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Frank urges hard look at executive compensation

Changes could require paybacks when bets sour

Email|Print|Single Page| Text size + By Ross Kerber
Globe Staff / March 19, 2008

US Representative Barney Frank said he will be calling for more scrutiny of executive compensation in the wake of turmoil in the world financial markets.

Frank, the Newton Democrat who is chairman of the House Financial Services Committee, believes some companies reward executives too much for taking on extraordinary risk and those risks are now threatening to cripple the financial system.

"It's time to revisit the issue of top executive compensation," Frank said in an interview yesterday. "We're not just talking about the large amounts of money, but the perverse incentives they have" to take risks that can vastly increase their payouts.

Frank points to how the Federal Reserve had to take emergency action to extend credit over the weekend to allow for the sale of Bear Stearns Cos. to financial services rival JPMorgan Chase & Co. - a move Frank said he supported.

But while the fire sale wiped out billions of dollars in shareholder value, including shares held by Bear Stearns executives, it still left many, including former chief executive James Cayne, with millions of dollars earned during the period the firm was making bad investments involving risky securities such as subprime mortgages.

Frank said he isn't ready to propose specific changes, but some could involve requiring executives to pay back money when bets go wrong. "You have to have some way to say that when you make money when things go well, then you have to lose money" when things go badly, he said.

Last year Frank led efforts to give shareholders a vote on executive pay packages. But his latest comments show how the current credit crunch could unleash political forces that change many corporate practices.

Jack Dolmat-Connell, a compensation consultant in Waltham who works for midsize public and private companies, said he expects many more questions to be raised over pay following the collapse of Bear Stearns.

In a paper he distributed yesterday, Dolmat-Connell called Bear Stearns's compensation structure "a very good design that went bad." The structure incorporated good practices like low base salaries but likely encouraged too much risk-taking that led to the problems, he said.

Jason Furman, a Brookings Institute policy analyst, said another policy change that could emerge is a plan proposed last week by Frank and Connecticut Senator Christopher J. Dodd, a Democrat, that would ease individual mortgage payments by allowing the Federal Housing Administration to guarantee homeowner borrowing.

Yesterday, Frank acknowledged the mortgage plan would have the negative outcome of rewarding individual borrowers who took on too much debt - much like the Fed propping up Bear Stearns. But, he said, in both cases government help is necessary.

"The argument is the same. If you don't step in to help people who were imprudent, we'll all pay the price," he said.

Ross Kerber can be reached at kerber@globe.com.

Barney Frank believes some firms reward officials too much for taking on risks that threaten to cripple the financial system.

TOO MUCH RISK

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