The Federal Deposit Insurance Corp. may propose rules requiring financial companies to limit and defer incentive-based executive compensation to restrict the kind of risk-taking blamed for sparking the 2008 credit crisis.
FDIC board members, meeting in Washington today, are scheduled to consider a Dodd-Frank Act requirement that federal agencies prohibit incentive-based executive pay that might provide “excessive compensation, fees or benefits” or lead to material financial loss by regulated companies.
Dodd-Frank, the regulatory overhaul enacted in July, directed agencies to rein in executive pay. Policy makers had faulted compensation incentives for fueling risky lending before the credit freeze that felled Lehman Brothers Holdings Inc. forced the U.S. to bail out banks including Citigroup Inc.
“Flawed incentive compensation practices in the financial industry were one of many factors contributing to the financial crisis,” agencies including the FDIC said in a statement on pay practices before Dodd-Frank was enacted. “Banking organizations too often rewarded employees for increasing the organization’s revenue or short-term profit without adequate recognition of the risks the employees’ activities posed to the organization.”
FDIC Chairman Sheila Bair said last month that regulators including the Federal Reserve and the Treasury Department were nearing agreement on a proposal that would require deferrals of pay and stock awards for executives.
“We’re very close to an agency agreement on a rule,” Bair said in a Jan. 13 CNBC television interview. “For risk-takers who bet the ranch, you will see additional requirements for the board to identify who those are and be more involved in their compensation as well.”
Regulators are preparing the new measures as banks increase salaries and shift more compensation to deferred stock and bonuses in response to criticism of pre-crisis payouts.
Goldman Sachs Group Inc. gave Chief Executive Officer Lloyd Blankfein a $12.6 million stock bonus for 2010, an increase from $9 million in restricted stock a year earlier, according to a filing last month with the U.S. Securities and Exchange Commission. His salary was increased to $2 million from $600,000, the company said in a separate filing.
The FDIC measure would be part of a joint rulemaking with the Fed, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Securities and Exchange Commission, the Federal Housing Finance Agency and the Office of Thrift Supervision, which is being eliminated under Dodd-Frank. OCC and OTS are Treasury Department units.
Companies to be covered by the rule include bank holding companies, broker-dealers, credit unions, investment advisers, and government-sponsored mortgage firms Fannie Mae and Freddie Mac. Companies with less than $1 billion in assets would be exempt under terms of the Dodd-Frank Act.