Testifying Friday before the House Financial Services Committee, three regulators endowed with new powers by the Dodd-Frank financial reform act outlined their intentions for overseeing executive compensation. But lacking certain key details, their message seemed simply: trust us.
Federal Reserve general counsel Scott Alvarez, SEC director of corporate finance Meredith Cross and FDIC associate director of insurance and research Marc Steckel each gave testimony at the hearing, which was broadcast on the web. They argued executive pay at some of America's biggest companies is tied to risk, and that companies should strive to align the interests of executives with those of the company. The presentation was largely consistent with former pay czar Kenneth Feinberg's proposals last year.
The Dodd-Frank financial reform gives regulators the power to write rules governing executive compensation. Cross said the SEC will release its rules by next summer. But, judging by the three witnesses' presentation, that process seems to be still in its preliminary stages. The witnesses discussed various reform strategies, such as a structured deferral of compensation, but for the most part, the discussion was general.
When pressed on specifics, the witnesses had trouble responding. Alvarez said regulators would not put caps on executive salaries or mandate specific dollar amounts. He said that's not the Federal Reserve's area of expertise, adding, "That's up to the company itself."
Rep. Leonard Lance (R-N.J.) asked the witnesses to name a specific maximum for executive compensation, to say how much would be "inordinately large." But none would give a dollar amount. "I would be reluctant to do that," Steckel said.
"It's very nuanced," Alvarez said. "There is no number."
Cross had a similar answer, saying the limit is when "the risks to the institution outweigh the rewards to the institution."
Granted, different companies will have different definitions of "inordinately large." But Rep. Alexander Green (D-Tx.) said a discussion about executive compensation cannot be divorced from numbers. "If we don't talk about the amount of the compensation, we don't really get an understanding of why people would do these things," he said. "The systemic risk is created by persons who make hundreds of dollars per second."
Rep. Patrick McHenry (R-N.C.) expressed frustration with the vagueness of the proceedings. When he asked the witnesses how they would regulate multinational corporations, Cross said the SEC would draft rules and release them next summer. McHenry wasn't satisfied.
"Basically you're telling me you'll do what you normally do," he said. "Which is you'll get input and you'll make a rule."