- Lenders already have curbs, some implemented after the crisis
- Proposed rules apply to employees deemed major risk-takers
The six largest U.S. banks, which already restrict terms of senior executives’ incentive compensation, would face tougher limits under a new set of proposed U.S. rules.
At JPMorgan Chase & Co., Chief Executive Officer Jamie Dimon would have payouts on some performance-based equity awards delayed to four years after vesting, double the period described in the company’s latest proxy statement. The rules would also extend deeper into each bank’s workforce, affecting not only the highest-paid employees but those who are deemed to take significant risk with the institution’s capital.
The recommended compensation curbs, which the National Credit Union Administration released Thursday for public comment, would harden and extend the biggest banks’ existing practices, many of which were implemented after the collapse of Lehman Brothers Holdings Inc. ushered in the worst financial crisis since the Great Depression.
Banks have been preparing for tougher rules since the last recession, said John Trentacoste, a managing director at executive compensation consultant Farient Advisors.
“A lot of the provisions that have come into pay programs in the last five years are all to show that this is really a long-term game for both shareholders and executives, and that they’re not in it for the one-year gain,” he said in a telephone interview from Los Angeles.
Wall Street executives would have to wait at least four years to collect most of their bonus pay and could be forced to return money to their employers if they take inappropriate risks or break the law, according to the proposals from the NCUA, one of six federal agencies that would adopt the rules. The other regulators, including the Federal Reserve and Securities and Exchange Commission, are expected to follow.
All six of the biggest U.S. banks have holding periods for portions of equity awards that extend into retirement, according to their filings. They also have policies that allow them to claw back incentive compensation from executives and in some cases, other employees with material influence over risk.
Spokesmen for JPMorgan, Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co. declined to comment on the compensation proposal.
Regulators may be misguided in seeking to manage risk by extending the time that employees need to hold stock awards, said Frank Glassner, CEO of Veritas Executive Compensation Consultants.
“Instead of vilifying the banks in this case, the biggest question is what are we trying to accomplish?” he said.
Shareholders have their own initiatives to curb risk-taking. Investors at Citigroup, Bank of America and JPMorgan will vote in coming weeks on proposals asking the boards to prolong the minimum holding period for deferred awards to executives to as long as 10 years.
Pay practices that rewarded quick deals and short-term gains contributed to the 2008 credit meltdown, according to the Financial Crisis Inquiry Commission. Under the Dodd-Frank regulatory overhaul signed into law almost two years later, regulators were required to limit those kinds of incentives to help protect the financial system.
The proposed rules could apply to senior executives as well as any employee designated a “significant risk-taker.”
At banks with assets exceeding $250 billion, the highest-paid 5 percent of employees whose incentive compensation accounts for at least a third of total pay would be affected. The rules also include those with “authority” to commit or expose 0.5 percent of the bank’s common equity tier 1 capital.
Employees would have to return bonuses -- even those already vested -- if they take inappropriate chances, draw an enforcement action or cause a loss by exceeding a firm’s risk limits, according to the proposals.
The clawbacks could be implemented for as long as seven years and would apply even to people who no longer work for the company, according to the proposal.
JPMorgan requires Dimon to keep shares he’s received from performance-based equity awards for two years after they’re given to him. The new proposed rules could force the bank to extend that period to four years.
However, Dimon must keep 75 percent of shares received from awards, net of taxes, until he retires, according to the bank’s policy. That condition could overlap, and in some cases exceed, the new rules depending on how long he remains on the job.
Morgan Stanley’s James Gorman and Citigroup’s Mike Corbat also are required to keep about three-quarters of their shares from equity compensation until they’ve retired, filings show. Corbat would also need to retain half of his shares in his first year of retirement. Both receive long-term equity with three-year performance periods. Once vested, those shares could be subject to the new four-year holding period.
Goldman Sachs CEO Lloyd Blankfein must keep 75 percent of all after-tax shares received before January 2015 and half of all shares collected since then. His performance-based stock awards could become subject to the four-year holding period. He also receives a long-term cash award that pays out after eight years. Adding the four-year holding period could mean that it would take 12 years for him to receive the cash.
Performance-based equity awards for Bank of America CEO Brian Moynihan and Wells Fargo’s John Stumpf typically vest after three years and could become subject to the proposed four-year holding requirement. The banks require both CEOs to keep half of all after-tax shares from awards until one year after retirement.
Except for Moynihan, each of the six CEOs also receive annual cash bonuses that typically pay out at the end of their fiscal years. If those bonuses are considered incentive-based pay under the new rules, they could also become subject to the four-year holding period.
“What remains to be seen is how deep into the organizations this will cascade and how that will change the way these people are compensated,” Trentacoste said.