Executive pay, clawbacks, and unfinished Dodd-Frank incentive compensation regulations are back in the headlines as everyone from President Biden to the Financial Times weighs in on the recent banking crisis. The collapse of Silicon Valley Bank and Signature Bank have driven a number of public demands, calling to mind the intense finger-pointing of the 2008 financial crisis:
- President Biden issued a statement calling on Congress to expand the FDIC’s authority to claw back compensation (including gains from stock sales), bar executives from working in the banking industry again, and levy fines against executives of failed banks. The WSJ reported that both the CEO and CFO of Silicon Valley Bank sold shares the week before the bank collapsed through a 10b5-1 plan filed just 30 days earlier. This is in no way proof of wrongdoing, but it was not missed by lawmakers or the press.
- Rep. Maxine Waters (D-CA), Ranking Member of the House Committee on Financial Services, called on regulators to investigate the executives of SVB and Signature Bank for misconduct, including a detailed review of stock sales, and to complete Section 956 of the Dodd-Frank Act, one of the last executive compensation provisions that remains unfinished and one which would prohibit pay arrangements that encourage inappropriate risk-taking. This was echoed by Senator Gary Peters (D-MI) who tied the banks’ failure directly to the need for implementation of the rule.
- The Financial Times reported that SVB’s CEO and CFO may have been incented by a return on equity metric in the long-term plan to “boost profitability by buying riskier assets exposed to rising interest rates.” The article noted that SVB’s clawback policy did not specifically include a provision to recoup pay due to adverse risk outcomes, instead focusing on financial restatements or wrongdoing. Whether or not it is reasonable to argue that the use of a return on equity metric (which is extremely common both inside and outside the financial industry) encourages “inappropriate risk-taking,” the fact that the Financial Times made the connection will only strengthen the calls for regulatory and legislative action above.
Meanwhile, Willis Towers Watson published part two of its excellent series on how to update clawback policies going forward, including a detailed inventory of each element of executive pay and the types of deferred compensation that may be impacted by the new SEC clawbacks rule.
Published on: March 24, 2023
Authors: Ani Huang
Topics: Executive Pay Plan Design
President and CEO, Center On Executive CompensationContact Ani Huang LinkedIn