Executive comp rules still unclear | FT Alphaville

Executive comp rules still unclear

The Washington Post picks up on the idea, thus far mostly pushed by academics, that executive compensation should reflect accountability not just to shareholders of financial institutions but to other stakeholders as well.

We wrote about this in early August, and WaPo moves things forward by discussing which part of Dodd-Frank potentially gives regulators the authority to enforce new compensation structures for banks (emphasis ours):

For the all the changes to the regulatory fabric contained in the landmark Dodd-Frank law, none might be more significant to the financial sector’s health than Section 956(a).

That largely overlooked provision of the law gives federal agencies expanded powers to write regulations dictating pay at financial firms. How they choose to use these powers could have a major impact on whether banks pursue excessive risks. …

For now, banking regulators have decided to stick with the guidance-oriented approach they adopted in June. The guidance requires that banks ensure that pay plans reward long-term performance rather than excessive risk-taking; that banks monitor their risks carefully; and that boards play a large role monitoring compensation practices.

The article doesn’t get into the details of which regulators have the authority to do this, or how long before it takes shape, but we can do that now.

According to a handy summary from law firm Paul Weiss, the “appropriate federal regulators” with authority to write rules on pay for financial institutions are the Fed, Comptroller of the Currency, FDIC, Office of Thrift Supervision, National Credit Union Administration Board, the Federal Housing Finance Agency, and the SEC.

Quite a big group — we’ll see if they can play nice and reach some kind of an agreement. As to what, exactly, they need to do, here is Paul Weiss:

Further, the appropriate regulators must jointly issue rules to prohibit any incentive- based payment arrangement that they determine will encourage inappropriate risks by the covered financial insitutions by providing their executive officers, employees, directors or principal shareholders with excessive compensation, fees or benefits or that could lead to material financial loss to the institution.

These regulators have nine months from the day that the bill was enacted (July 21) to finish writing the rules.

So this is another of the many issues, also including derivatives and asset-backed securitization, under FinReg where federal regulators will have to collaborate and come to a decision later on.

The question, of course, is whether the regulators will actually use this authority to enact rules requiring financial institutions to include the performance of non-stock securities when drawing up pay plans.

Forcing through such an overhaul would be tricky considering the number of regulators involved, and The Post reports that the complexity of writing such specific rules is a daunting task given the heterogeneity of the institutions that would be affected.

For now regulators are focused more on scrutinising the pay plans that will be voluntarily submitted by the banks. But the Post also writes that time remains and “regulators could change their minds”.

We’ll let you know if they do.

Related links:
Wall Street reform gives regulators power over executive pay
– WaPo
Blaming shareholders
– FT alphaville
Corporate Governance and Executive Compensation Provisions in the Dodd-Frank Act – Paul Weiss
Dodd-Frank full text
– Library of Congress