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For Immediate Release: November 10, 2005

Contact:	Steve Adamske, 202-225-7141

FRANK INTRODUCES LEGISLATION TO PROTECT SHAREHOLDERS FROM ABUSES OF EXECUTIVE COMPENSATION

Washington, DC- Congressman Barney Frank, the Ranking Democratic Member of the Financial Services Committee, today introduced "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 are 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 compensation 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 CEOs 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 comes 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, and 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.

 

Click here for additional information on "The Protection Against Executive Compensation Abuse Act".

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The Committee oversees all components of the nation's housing and financial services sectors including banking, insurance, real estate, public and assisted housing, and securities. The Committee continually reviews the laws and programs relating to the U.S. Department of Housing and Urban Development, the Federal Reserve Bank, the Federal Deposit Insurance Corporation, Fannie Mae and Freddie Mac, and international development and finance agencies such as the World Bank and the International Monetary Fund. The Committee also ensures enforcement of housing and consumer protection laws such as the U.S. Housing Act, the Truth In Lending Act, the Housing and Community Development Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Community Reinvestment Act, and financial privacy laws.