WASHINGTON (CN) – As forces gather for a battle between the White House and Wall Street, Democratic lawmakers on Friday scolded enormous pay packages for business executives and called for rules on pay while Republicans decried the proposals as big government. “Most who opposed raising the minimum wage to $7.25 an hour are supporters to a bonus structure that creates systemic risk,” Texas Democrat Al Green said in a dig at Republicans.
Ohio Democrat Mary Jo Kilroy spoke out against the $140 billion in cumulative Wall Street bonuses last year during the House Financial Services Committee hearing. “This is 10 percent of the entire United States deficit,” she said, then speaking of Americans, added, “They don’t get that when you ruin an economy, you get these kinds of bonuses.”
While Democrats said they are not interested in dictating executive pay in the private sector, they proposed changing the incentives so that excessively risky behavior is not encouraged, like allowing shareholders to vote on executive compensation.
Republicans spoke out against government involvement in private sector pay, many claiming the free market should be able to handle itself and that the government is just looking for someone to blame for the economic downturn. They did, however, call on regulations on pay for executives who work in government owned companies like Fannie Mae and Freddie Mac.
“The American government is set upon an adventure in scapegoatism,” Texas Republican Jeb Hensarling said.
The hearing comes at the heels of administration efforts to get a regulating hand on the financial sector. President Obama proposed rules earlier this week to prevent banks from growing too big and stop them from using their unique safety nets and perks to make excessive profits.
Obama also called last week for a new fee on the nation’s largest banks to fully recover the losses of the bailout and has told senior lawmakers that he wants an independent consumer protection agency as part of the financial reform package.
The witnesses present had been selected by the Democrats, and their testimony largely agreed with what the Democrats proposed.
Nell Minow, founder of The Corporate Library, which provides investors with information on executive compensation, suggested that executive compensation will continue to be excessive if regulation is not imposed. “A corporation has no soul to be damned, no body to be kicked,” she said. “That is why corporations essentially get away with murder in corporate compensation.”
“They took bailout money and paid themselves as if they had earned it,” she said of executives running bailed-out companies. “It’s an outrage.”
Columbia Business School Professor Joseph Stiglitz criticized the current structure of compensation, which is often based on stock increases and rising profits. He said it’s often difficult to judge the real health of financial firms because, “they have enormous discretion to make money,” he said.
“Much of what you call incentive pay is not incentive pay, it’s a charade,” Stiglitz said, noting that a lot of reported company earnings are “phantom profits.”
Instead of private compensation practices, Republicans preferred to focus on the large bonuses at government-owned Fannie Mae and Freddie Mac on Christmas Eve, when the two CEOs pocketed pay packages of $6 million each in cash, and the other executives received a cumulative $42 million.
Massachusetts Chairman Barney Frank replied that there would be a hearing on public sector compensation later, but that this hearing had only to deal with private sector compensation. “We have here an embarrassment on the part of my Republican colleagues because they don’t want to do anything about the excessive pay in the private sector nor do they want to appear to not be doing anything about it, so they’re changing the subject.”
Frank noted that all the Republicans at the hearing had voted against two bills limiting compensation, “so I’m a little skeptical as to why we have this coming up now,” he said.
Alabama Ranking Member Spencer Bachus replied that those bills had been too broad, extending their reach into both the public and private sectors, and to all employees instead of just company executives.
Republicans made frequent objections that Frank had not called their witness, Ed Demarco. Demarco is the acting director of the federal housing financial agency, which oversees Fannie Mae and Freddie Mac and he approved their Christmas Eve executive pay packages.
Frank said that a hearing on the compensation in the public sector will be held next month, and that it would be more appropriate for Demarco to appear then. He remarked that Republicans should understand the distinction between the public and private sector hearings because they had been pushing for such distinctions in compensation regulations.