Center On Executive Compensation

Financial Regulators Considering Even Greater Compensation Restrictions Under Dodd-Frank

Published on: February 11, 2011

Topics: Executive Pay Legislation and Regulation, The UK and European Union

Proposed rules approved this week by the FDIC would effectively give financial regulatory agencies the authority to prohibit compensation for executives and other employees they determine is excessive or that could encourage a risk of material loss.  The rules, authorized by the Dodd-Frank Act, require the appropriate regulators to review incentive arrangements and total compensation of all covered individuals of large financial institutions and compare the information to that of similar positions at competitors, while taking into account the financial condition of the institution.  Regulators would be required to prohibit arrangements deemed excessive or that may cause a material loss.  Covered institutions also would be required to file an annual report summarizing covered individuals and the organization’s risk mitigation strategies.  Given that such a review has never been done on this scale, the review of this information would likely be a Herculean undertaking.  If a financial institution has more than $50 billion in assets, even more restrictive rules apply, requiring the boards of such institutions to identify and approve the compensation of all employees with the ability to make decisions that may cause material harm.  In addition, the regulations mandate deferral of 50 percent of incentive-based compensation for at least three years for "executive officers" of those larger institutions.  The Center will file comments with the FDIC urging that the final rules should comport with sound compensation principles.  Coincidentally, the United Kingdom also announced new rules for financial institutions this week, requiring the compensation committee chairman of its four largest banks to sign off on the compensation packages for the 10 highest paid individuals in each area of the bank.  The British government also expanded public disclosure of compensation and limited cash bonuses for executives of nationalized banks to just over $3,000.