University of Southern California

U.S. Lawmakers Seek Advice from USC Marshall Professor
Executive Compensation Expert Kevin Murphy Appears Before the House Financial Services Committee
June 18, 2009 • by Anne Bergman

With US taxpayer outrage still simmering over the big bonuses Merrill Lynch and AIG paid to their employees after receiving Federal bailout money, USC Marshall School of Business Professor Kevin Murphy appeared Thursday, June 11, 2009 before the House Financial Services Committee to discuss his field of expertise, executive compensation.

Dr. Murphy, who holds the Kenneth L. Treffitzs Chair in Finance and teaches in Marshall's department of Finance and Business Economics, is the author of more than 40 articles, cases, books, or book chapters relating to compensation and incentives in organizations.

Murphy agreed to appear at the hearing on "Compensation Structure and Systemic Risk" to discuss regulating executive compensation because he was already in DC meeting with the Federal Reserve to discuss the very same issue. "If executive pay is regulated," Murphy explains, "the Federal Reserve will do it, as they’re the regulatory body."

As Murphy testified in front of Congress, his opinion is "that regulating compensation in financial services more broadly will cripple one of our nation's most important and historically most productive, industries."

The Treasury Department's counselor Gene Sperling, Harvard Law School's Lucien Bebchuk and Nell Minnow of The Corporate Library were among the panelists who also testified in front of the committee, which is chaired by Congressman Barney Frank from Massachusetts, who's seeking new laws on compensation structures.

One of Murphy's concerns is that to base pay on objective assessments of an individual's performance is impossible and "part of why we're in this mess in the first place." For example, Murphy testified, "consider mortgage brokers paid for writing a large number of loans rather than writing loans that the borrowers will actually pay back.”

"A solution to this performance-measurement problem is to pay people to write 'good loans' and penalize them for writing 'bad loans," Murphy continued in his testimony.

Murphy advises that companies not reward short-term results and to avoid "paying bonuses all at once. Pay them over a period of time to make sure the performance is real."

Overall, Murphy argues it's not "in the taxpayers' interest to eliminate bonuses or limit the top pay of executives. Banks are losing their best people who are starting their own hedge funds. These are precisely the people who understand the complex interests that got us into trouble. If they leave, there's no one there who understands what the risks really are."

After his Thursday morning testimony, Murphy's day was far from over. Next up was an afternoon meeting with the Obama administration's new pay czar, Kenneth Feinberg, whose appointment was only announced the night before.

As for the public outrage over executive salaries, Murphy acknowledges, "The anger is understandable. But we shouldn't make policy decisions when we’re angry."

About the USC Marshall School of Business
Consistently ranked among the nation's premier schools, USC Marshall is internationally recognized for its emphasis on entrepreneurship and innovation, social responsibility and path-breaking research. Located in the heart of Los Angeles, one of the world's leading business centers and the U.S. gateway to the Pacific Rim, Marshall offers its 5,700-plus undergraduate and graduate students a unique world view and impressive global experiential opportunities. With an alumni community spanning 123 countries, USC Marshall students join a worldwide community of thought leaders who are redefining the way business works.