House Oversight and Government Reform Committee Investigates CEO Severance Packages

The House Oversight and Government Reform Committee held a hearing on “Executive Compensation II: Mortgage CEO Severance Packages,” focusing on CEOs involved in the ongoing subprime mortgage crisis.

Chairman Waxman (D-CA 30) said corporate executives currently earn an average of 600 times more than the average employee, up from 40 times in 1980. A CEO can sometimes earn all of 10% of a companies net profits. This works out to around $160,000 per hour. He also said that such earnings may be justified by market conditions but that this does not explain the recent hundred million dollar severance packages received by the former executives of Countrywide, Merrill Lynch, and Citigroup, all of which recorded multi-billion dollar losses before their resignations.

Ranking member Davis (R-VA-11) shared these concerns, but warned against congressional involvement, fearing the consequences of micromanaging these volatile financial markets.

Susan Wachter, professor of financial management of the University of Pennsylvania’s Wharton School, described a misalignment of incentives that led to the recent economic troubles which contributed to these huge corporate losses.

Anthony Yezer, Economics Professor at GWU, stated that borrower education is not a viable option for preventing similar financial troubles because borrowers lack the mathematical understanding that predicates financial understanding.

Nell Minow, editor of The Corporate Library, said that the pay packages given to executives contributed directly to the economic crisis because they created incentives to produce more business rather than better.