Coming off a year in which Wall Street experienced the lowest average bonus since 2012, it now has to brace itself for new regulation on incentive compensation. One of the last pieces of Dodd-Frank to be written and implemented, regulators are looking to firm up the rules surrounding incentive pay for banks. The final regulation, once agreed upon, will not just apply to banks, it will also apply to investment advisers, broker dealers, credit unions, and executives at mortgage finance companies Fannie Mae and Freddie Mac according to the Wall Street Journal.
Six agencies have joint responsibility for rewriting the original government plan on Wall Street pay: FDIC, the OCC, the NCUA, the Federal Reserve, the SEC, and the Federal Housing Finance Agency. The National Credit Union Administration plans to meet today to unveil their latest proposal, with the rest of the regulators expected to follow shortly thereafter.
At the heart of the NCUA proposal are three main components: Bonus deferrals, Bonus clawbacks, and Risk Management and Controls. These are all slightly different for each level, defined by total assets of the firm.
Here are the three levels, according to the NCUA proposal
- Level 1: Greater than or equal to $250 billion
- Level 2: Greater than or equal to $50 billion and less than $250 billion
- Level 3: Greater than or equal to $1 billion and less than $50 billion
Below is a quick summary of the key takeaways from each component.
Bonus Deferrals
The key takeaway here is that for Level 1 firms, 60% of a senior executive’s qualifying incentive-based compensation and 50% of a significant risk-taker’s qualifying incentive-based compensation would have to be deferred for at least four years.
Clawbacks
The proposed rule would require clawback provisions that, at a minimum, allow the covered institution to recover incentive-based compensation from a current or former senior executive officer or significant risk-taker for seven years following the date on which such compensation vests, if the covered institution determines that the employee engaged in misconduct that resulted in significant financial or reputational harm.
Risk Management and Controls
Under the proposal, all Level 1 and Level 2 institutions would have to create and implement risk management frameworks and internal controls around incentive based compensation programs. These controls would ensure that incentive based compensation plans are monitored and that the plans appropriately balance risk and reward, as well as ensuring the compliance of the incentive based compensation programs with the institution’s policies and procedures. [ZH: SOX 2.0].
Anyone who wishes to actually read the NCUA’s 278 page proposal in its entirety can do so here.
While we understand the motive behind such policies, the reality of the situation is that instead of incentive based pay, executives and managers will just begin to require (and receive) higher base salaries, as they did after the financial crisis when . This will inevitably put the government in a difficult situation, as the narrative thus far has been that it doesn’t want to dictate how much someone can get paid, it just wants to ensure that risk taking will be closely tied to incentive compensation.
As a reminder, here is a chart showing total and average Wall Street bonus over the years.
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Here is a CNBC clip on the topic
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