Photographer: Michael Nagle/Bloomberg

Wall Street Bonus Pay Restricted Under Regulators' Proposal

  • Rules would allow bonus clawbacks over inappropriate actions
  • U.S. plan adopted by credit-union watchdog; others to follow

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 if their companies lose big under rules being proposed to install one of the last major planks of the Dodd-Frank Act.

The ban on bonus practices that reward excessive risk-taking would strike hardest at senior executives and key employees at financial companies with more than $250 billion in assets, according to the long-delayed incentive compensation measures released by the National Credit Union Administration. NCUA, one of the six agencies that must adopt the rule, voted Thursday to put out the proposal for public comment. The other regulators, including the Federal Reserve and Securities and Exchange Commission, are expected to follow.

QuickTake Banker Bonuses

The proposal would let companies take back bonuses -- even those already vested -- if an employee takes inappropriate risks, draws an enforcement action or exceeds a firm’s risk limits and causes a loss. Clawbacks could happen for as long as seven years and would apply even to former employees who have left the company, according to the proposal, which represents six years of combined work from regulators to interpret one of the core provisions of the 2010 Dodd-Frank law.

Skewed incentives played a key role in the 2008 credit crisis as financial-industry executives seeking the biggest possible payouts exposed companies to risk that led in many cases to disastrous consequences. Dodd-Frank demanded that regulators strangle those kinds of incentives as a way to help protect the financial system.

Tiered Restrictions

The bonus deferrals in the proposal are tied to the size of the company as well as to the role of the employee -- covering not just top executives but also those in a position to have major impact on the firm’s bottom line. Senior officers of the largest firms would have 60 percent of their bonuses delayed for four years. Top executives at companies between $50 billion and $250 billion of assets would have half of their bonuses deferred for at least three years. The plan gives firms a pass on arrangements already in place.

Regulators scrapped an earlier version of the rules in 2011 after a flood of criticism. In a meeting in February of this year, President Barack Obama reminded the agency heads of their obligation to get rid of pay practices that encourage companies to take “big, reckless risks.” The new proposal is significantly tougher than the earlier effort and exerts most of its weight on companies with more than $50 billion in assets, though narrower limits would apply to all financial firms down to $1 billion in assets.

The Federal Deposit Insurance Corp. is set to vote on the pay rules on Tuesday, and the Comptroller of the Currency -- a member of the FDIC board -- typically signals his agency’s approval at the FDIC’s meeting. The Fed and SEC haven’t said when they will act. The Federal Housing Finance Agency also has to release a proposal.

Regulators’ Difficulties

One of the difficulties the regulators faced in agreeing on a standard was the wide differences in pay practices in the industries they oversee. Bank compensation typically includes a salary, stock and a bonus awarded at the end of the year. In firms regulated by the SEC, asset managers are paid through fees based on the scale of their funds and the success of investments.

Regulators also had to wrestle with the concept of applying rules meant to curtail risk to an industry that is based on taking risks.

The SEC estimated that 131 brokerages and about 669 investment advisers will be affected by the rule, with the most stringent restrictions targeted at the 49 brokers and 39 investment advisers, including hedge funds, that exceed the $50 billion assets mark.

Since the crisis, the biggest banks have shrunk businesses, cut staff and overhauled compensation plans in the face of stiffer capital rules, lackluster revenue growth and continued backlash over pay that rewarded bad behavior. Wall Street bonuses have been slashed, and executives now see a bigger share of pay from awards tied to performance. The money is often paid out over several years.

Goldman Sachs Chief Executive Officer Lloyd Blankfein’s 2015 pay package made him the best-paid big-bank leader for a fourth straight year. He was awarded $30 million, including a $7 million long-term incentive award tied to profitability and spread out over eight years. JPMorgan Chase & Co. CEO Jamie Dimon was awarded $27 million, including a $5 million cash bonus and $1.5 million salary.

NCUA’s proposal will be opened for public comment through July 22. The rule wouldn’t go into effect for more than a year after the final version is approved.

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