Uncertainty abounds after FDIC rule on bank executive compensation
The Federal Deposit Insurance Corp. board of directors fired what some consider a "shot in the dark" Monday by voting in favor of a Dodd-Frank Act reform rule that will require large banks to defer 50% of their incentive-based bonuses to executives for a period of three years. The reasoning behind the three-year deferment: The agency wants to ensure payouts to corporate leaders are measured against performance standards, while also managing risks taken in the short and long-term. If implemented, the compensation deferment rule will impact bank executives at institutions with assets of $50 billion or more, including both government-sponsored enterprises, Goldman Sachs (GS) and the big four banks: Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC), according to the FDIC. The FDIC says the proposed rule will be open for public comment for 45 days after being published in the Federal Register. However, the rule will not be published until other federal agencies, including the Federal Financial Institutions Examination Council (FFIEC), the Securities Exchange Commission (SEC) and the Federal Housing Finance Agency (FHFA), independently approve the measure. While the rule ties into the goal of regulators to force banking executives to brace for risk and to have skin in the game for the long-haul, corporate governance analysts say measuring the fine line between having enough regulatory power and having too much is difficult, especially in the area of executive pay. Claudia Allen, an attorney and chairwoman of Chicago law firm's Neal Gerber Eisenberg's corporate governance practice group, said determining the cut off point between the two extremes is the "holy grail" question of corporate governance today. "The general question is: Do these regulations create unnecessary economic costs?" Allen said. "Are they pro-growth? Are they excessive or just right? There has been a lot of regulatory interest in how to make sure that boards and executives are taking prudent risk, not excessive risks." The issue became even more pronounced after taxpayers stepped in more than two years ago to bail out financial institutions burdened by debts after a period of institutionalized risk-taking. Allen said the tough part is balancing this idea of containing excessive risk with a basic societal fact that "you have to take some prudent risks to run a business." She said the "question is are the regulators doing it in a way that is prudent, or are we creating other societal costs?" Write to Kerri Panchuk.