The Disastrous Unexpected Consequences of Private Compensation Reforms - Testimony to the House Committee on Oversight and Government Reform Hearing: 'Executive Compensation: How Much is Too Much?'
Testimony to the House Committee on Oversight and Government Reform, October 28, 2009
18 Pages Posted: 16 Jan 2010
Date Written: October 28, 2009
Americans are not nearly as angry as they should be about executive compensation. If they knew more, they would be angrier. The current crisis is only the latest in a series of intensifying crises brought on by epidemics of “control fraud.” “Control fraud” is a white-collar criminology theory that explains frauds in which those that control a seemingly legitimate entity use it as a “weapon.” In the financial sphere, accounting is the “weapon of choice.” Accounting control frauds’ ability to create record (fictional) profits means that compensation is a major driver of fraud epidemics and executive compensation is the primary means by which control frauds convert a firm’s assets to their own personal benefit – while minimizing the risk of prosecution.
We need to recognize that compensation, not simply executive compensation, is what has perverted private market discipline. Second, we need to recognize the critical role that executive compensation plays in producing epidemics of accounting control fraud. Third, we need a massive crackdown on accounting fraud – which will allow us to claw back the massive fruits of accounting fraud that executives have already received. We need to provide the FBI promptly with a minimum of 1000 new white-collar crime specialists and prioritize their investigations on the leading nonprime specialty lenders and investors. The Fourth, we need to realize that huge pay for senior executives must be given only on the basis of real, sustained performance.
What we need is a commitment to “vigilant” regulators who do not have a “mandate … to look the other way.” That does mean professionals from the civil service rather than the shameful political appointees that were appointed precisely because they did not believe in regulation.
Keywords: Corporate law, Financial crisis, Financial regulation, Banking, Banking regulation, Securities, Securities regulation, Control fraud, Fraud
JEL Classification: K14, K22, K23, K42, G18, G28, G38
Suggested Citation: Suggested Citation