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FRANK INTRODUCES
LEGISLATION TO PROTECT SHAREHOLDERS FROM ABUSES OF EXECUTIVE COMPENSATION
November 10, 2005
FOR IMMEDIATE RELEASE
CONTACT: Steve Adamske 202.225.7141
Congressman Barney Frank, the Ranking Democratic
Member of the Financial Services Committee today introduced the “The
Protection Against Executive Compensation Abuse Act” to address the problem
of runaway executive compensation by requiring greater disclosure of
executive compensation to shareholders. Frank’s initiative would not set any
artificial limits on individual executive compensation. Rather, the
legislation would give shareholders more information about management pay
packages and empower shareholders to take action against management abuse
and self-dealing.
“We have witnessed a number of high profile executive pay packages that are
hidden to the owners of the company, the shareholders, and I want to make
sure we have full disclosure,” said Frank. “We am not taking anybody’s pay
or even setting any limits, we just believe these owners should know how
their employees (management) are being paid and have some ability to do
something about it if they so desire.”
“The wild imbalance in executive compensations and the often perverse
incentives that accompany them encourage CEOs to sell out the best interests
of their shareholders and employees, as we in Massachusetts have had
occasion to experience,” Secretary Galvin said. “Congressman Frank’s
legislation will turn a much-needed spotlight on these incentives that have
warped so much of our corporate culture.”
The bill would require that public companies include in their annual report
and accompanying proxy solicitations a comprehensive “Executive Compensation
Plan.” This Executive Compensation Plan must be approved by shareholders and
include:
Full Disclosure of Top Executive’s Compensation including any and all
types of compensation paid (or to be paid) to top executives (such as
pensions, golden parachute agreements, personal use of private jets/company
apartments and other currently hidden compensation);
Full Disclosure of Compensation Policies for Top Executives including the
short and long-term performance measures or targets that will be used to
determine the top executive’s compensation (and whether such measures were
met in the preceding year); and
Company Policy for Recapturing Any Form of Incentive Compensation That
Subsequent Financial Results Show Are Unjustified such as when the company
pays bonuses/grants stock options to executives for meeting performance
targets only to later learn that these numbers were inaccurate and must be
restated.
Frank is concerned that shareholders and consumers are often left holding
the bag for CEO greed and Board abdication. According to the Corporate
Library’s recent CEO Pay Survey, the median total compensation received by
CEO’s increased 30 percent in fiscal 2004, with the average increasing 91
percent--driven by 27 CEOs receiving compensation over 1,000 percent greater
than their previous year’s pay. The 2004 increase come on top of median
increases of 15 percent for fiscal 2003 and 9.5 percent in fiscal 2002.
This disparity has grown significantly over the last few years. In 1991, the
average large-company CEO received approximately 140 times the pay of an
average worker; in 2003, the ratio was about 500:1. The amounts have risen
so far so fast, that they can no longer be explained by traditional
valuations. Even when adjusting for other variables, such as company size,
performance, industry classification, inflation, studies find executive
compensation is far higher today than in the early 1990s.
While these numbers are themselves concerning, they also reflect real costs
to shareholders and the economy. In a recent study Harvard’s Lucian Bebchuk
and Cornell’s Yaniv Grinstein-- found that in 1993, the aggregate
compensation paid to the top five executives of U.S. public companies
represented 4.8% of company profits; by 2003 the ratio had more than doubled
to 10.3% and the total amount paid to these executives during this period is
roughly $290 billion. In addition to concerns about the sheer size, these
compensation schemes may give executives a perverse incentive to shirk their
duty to shareholders, for example:
Earnings Manipulation. Putting aside outright earnings fraud, because
accounting standards like FAS 133 are not always clear, excessive
compensation (particularly enormous bonuses based on meeting “Wall Street
expectations”) give executives an incentive to use “aggressive” accounting
methods that maximize his/her compensation. Years (or months) later, when
the company is forced to restate its earnings - and shareholder value
plummets - the executives retain their bonuses.
Unprofitable Mergers/Acquisitions. Because senior executives often receive
additional compensation when they buy a new company or sell their current
one (and are responsible for negotiating the overall deal), there is a
natural conflict of interest between the executives’ interest (i.e. closing
the deal and obtaining his/her “golden parachute”) and the company’s
interest (i.e. maximizing shareholder value).
As Congress has seen first hand, even executives of institutions that lose
money, restate earnings, and face extensive regulatory scrutiny have
received (and retained) substantial compensation packages. After being
forced out of Fannie Mae because the company used faulty accounting - and
announced a $9 billion restatement that could go up - Former Fannie Mae, CEO
Frank Raines will receive a pension worth roughly $1.4 million per year for
life and prorated portions of incentive stock awards that could be worth
millions of dollars. Unfortunately, Raines is hardly the exception.
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