Report Finds Federal Regulation Diluted Pay for Performance on Wall Street

December 02, 2010

Despite the widespread changes mandated by the Dodd-Frank Act, a new report written for the Council of Institutional Investors urges shareholder and legislative action to further rein in compensation practices in the financial services industry and beyond.  “Size, Structure and Significance for Shareowners,” by The Corporate Library, examines Wall Street’s pay culture leading up to the financial meltdown and how it has changed since then. The report confirms that while executive compensation changes for TARP companies were meant to create more aligned, less extravagant pay, they actually had the opposite effect: “In the tradition of unintended consequences for compensation regulations, salaries, which were not capped, ballooned.”  The report emphasizes that despite improvements in risk mitigation, longer deferral periods for equity and the adoption of clawbacks, it is time for U.S. financial institutions to tie compensation to long-term value growth.  More importantly, it urges shareholders to take additional steps to change compensation practices in the industry, including:

  • engaging directly with Wall Street firms to align pay structures with best practice;
  • voting against say on pay resolutions and filing specific pay-related resolutions; and
  • seeking legislative changes mandating deferral of a greater percentage of compensation over a long period of time and requiring clawback of deferred amounts if long-term performance targets are not achieved.
While the report reveals little new information, it may be a good indication of future activism on pay issues.