Today, the Congressional Oversight Panel (COP) held a hearing to examine executive compensation restrictions for companies that received Troubled Asset Relief Program (TARP) funds.

The following COP members made opening statements:

Ted Kaufman (D – DE), Chairman, Congressional Oversight Panel Damon Silvers, Director of Policy and Special Counsel, AFL-CIO Richard Neiman, Superintendent of Banks, New York State Banking Department Kenneth Troske, William B. Sturgill Professor of Economics, University of Kentucky The COP heard testimony from the following witnesses:

Panel 1:

  • Kenneth Feinberg, Special Master for TARP Executive Compensation (June 2009 – September 2010)

Panel 2:

  • Kevin Murphy, Kenneth L. Trefftz Chair in Finance, University of Southern California Marshall School of Business
  • Fred Tung, Howard Zhang Faculty Research Scholar and Professor of Law, Boston University School of Law
  • Rose Marie Orens, Senior Partner, Compensation Advisory Partners, LLC
  • Ted White, Strategic Advisor, Knight Vinke Asset Management; Co-Chair, Executive Remuneration Committee, International Corporation Governance Network

COP Chairman Kaufman opened the hearing by stating that “[i]n 2008, Congress authorized $700 billion to bail out the financial system … [a]s a condition of receiving taxpayer aid, companies were required to align their executive pay practices with the public interest. No one can argue against the ‘public interest,’ but in the context of executive pay, it is very difficult to define or measure.”

In the first panel, COP member Silvers questioned Mr. Feinberg about his conclusion that significant amount of executive pay was not appropriate, but was nonetheless in the public interest. When asked why the executive pay was inappropriate, Mr. Feinberg replied that such executive pay was not appropriate “because they were taking taxpayer money and feathering their own nests.” After some back and forth between the two, COP member Silvers stated that it seemed that Mr. Feinberg concluded that “it was not in the public’s interest to have an accurate finding here because it would trigger a process of recapture that you felt was not in the public interest to trigger.” Mr. Feinberg agreed.

COP member Neiman focused on the advantages of a rules-based vs. principles-based approach to executive compensation and noted that “it is clearly difficult to draw effective rules for all situations before the fact, but at the same time the enforcement of principles requires vigilance and discretion.” Mr. Feinberg stated that he saw the proper role for government as a combination of a principles-based and rules-based approach to executive compensation. “I think perhaps our most important proscription [was that] we concluded that compensation should be in the form of stock, but stock which cannot be transferable … except over a lengthy period of time so that long term performance of the company will determine the total pay package of the corporate official.”

COP Chairman Kaufman asked Mr. Feinberg if he thought his work has led to an idea of what pay is reasonable. Mr. Feinberg replied in the affirmative and stated that “the main elements of pay should be … low guaranty base cash salary, the remaining compensation in X stock in that company which cannot be transferred except over a lengthy period of time and … more effective corporate regulation of golden parachutes, perks, end of career severance payments and pension plans.”

During the second panel, COP member Silvers challenged Mr. Murphy about his statement that “clearly [executives] were punished for their actions,” asserting that “one of the effects of TARP appears to have been to perpetuate the accumulation of wealth by the very people and institutions that seem to have been responsible for our nation’s economic catastrophe.”

COP member Troske noted that “if we could simply get rid of the government guaranty that has created ‘too big to fail firm,’ then many if not most of these problems would largely disappear.” Mr. Murphy stated that “it is just going to be a fact of life [that] we can reward executives on the upside all day long, but we’re never going to be able to penalize executives sufficiently for huge downside, whether they are purchasing insurance or not.”

COP Chairman Kaufman asked whether or not the TARP executive compensation restrictions have been effective. Ms. Orens replied in the affirmative and stated that the restrictions have affected compensation today, but she expressed concerns that companies will not stay on this course in the future.