SEC Incentive Comp Redux

HRPA’s Center On Executive Compensation once again poked holes in the SEC’s misguided Dodd-Frank incentive compensation rules. 

• In comments filed this week, the Center reiterated opposition to the original 2016 proposal warning that the rules will harm the ability of financial institutions to attract and retain top talent.

Remind me, what is this again? 2010 legislation mandated that six federal agencies (the SEC, Federal Reserve, FDIC, OCC, NCUA and FHFA) jointly propose rules aimed at addressing excessive risk in incentive pay at financial institutions.

Yes, but: This, of course, proved to be nearly impossible to achieve and the rules were proposed (and abandoned) twice, in 2011 and 2016.

Fast forward nearly 15 years

• In May 2024, four of the six agencies revived the 2016 proposal – with some alarming potential revisions. 

• The SEC and Fed bowed out citing that updated analyses were needed to issue a rule that makes sense today.

Center advocacy: We gathered a working group of HRPA members within the industry to review the latest proposal and provide valuable feedback on the most problematic aspects of the rule. 

What we're saying: In comments based on our members’ collective perspectives, we: 

1. Urged against adopting a two-tiered approach, instead of the three tiers originally proposed, so that mid-size financial institutions will not be combined with the largest financial institutions and subject to the same recordkeeping and clawback mandates. 

2. Disagreed with changing the definition of a “significant risk taker” to be based on a compensation-only test as it follows the inaccurate assumption that pay level is correlated with an employee’s risk potential.

3. Supported the use of options as a performance tool and believe companies should determine the appropriate equity mix within their incentive plan design.

4. Contended that companies select metrics based on their strategic priorities, so eliminating the use of a financial metric is arbitrary and unduly restrictive.

The bottom line: Although the Section 956 regulations only apply to financial institutions, it is important that employer voices be heard so that similarly misguided rules don’t appear in the future.