US slowly moves to comply with international banker incentives and risk taking standards
09/05/2016
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Some years after the GFC-inspired international standards for banker pay were promulgated by the international Financial Stability Board (HERE), the US Federal Reserve Board has voted to re-propose the executive compensation rule arrangements for executives. Regulators believe this rule could encourage excessive risk-taking behavior.

The US has trailed behind Europe, Canada, Switzerland, the EU and Australia, among others in establishing banker compensation regulation.

The US rules should assist in leveling the global playing field in terms of attracting and retaining global banker talent, and should also better enable banks to move employees around the world where incentive structures and standards will become more similar.

The host of US bank regulators (i.e. the SEC, National Credit Union Administration, FDIC, OCC and FHFA) could not get their act together without enabling legislation at the federal level via the provisions of section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. They have released their versions of the proposed rule (see an example HERE).

The proposed rule would apply to banks with more than $1 billion in assets, dividing banks into three “tiers” based on asset size, with the largest banks subject to the most stringent requirements. Banks classified as “Level 1” (those with more than $250 billion in assets) and “Level 2” (those with $50 billion to $250 billion in assets) would be required to defer a percentage of qualifying incentive-based compensation for executives and significant risk takers for a specified amount of time. Regulators would have discretion over requirements for Level 3 institutions.

The proposed rule also requires institutions to keep a record of senior executives and risk-takers and to disclose the incentive-based compensation arrangements of those individuals. Additionally, the rule includes both a “malus” for forfeiting unvested incentives, and “clawback” provision that allows a covered institution to recover vested incentive-based compensation if the executive or risk-taker engaged in the behavior was found to have hurt the company. While clawback is already a common feature of US executive pay (as it was originally required under the Sarbanes Oxley Act stemming from the recession before the most recent recession), malus features are rare.

What is particularly interesting about the proposed rule is the limits it places on maximum incentive compensation. This has not been reported widely, and differs from the EU caps (see HERE). For covered institutions with $50 billion or more in assets, incentive-based compensation awards could not exceed target amounts by more than 125% for any senior executive officer or more than 150% for any significant risk-taker.

Australia’s APRA remuneration guidelines published in 2009 have no such caps (see HERE).

The US rules also require 60% of executive pay deferral at the larger “level 1” banks for a minimum of 4 years, and 50% of executive pay for smaller “level 2” banks for 3 years.

Comments are sought by 22 July 2016.

© Guerdon Associates 2021
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