April 22nd, 2016 5:59 am
Via WSJ:
By DONNA BORAK, ANDREW ACKERMAN in Washington and CHRISTINA REXRODE in New York
Updated April 21, 2016 7:29 p.m. ET
588 COMMENTS
Tens of thousands of Wall Street bankers face tighter restrictions on how they are paid under new rules proposed by U.S. regulators in response to the financial crisis of nearly a decade ago.
The rules are part of a broader effort to curb what regulators say is excessive risk-taking at the country’s biggest financial firms and go beyond senior executives todeal makers and traders who receive large shares of their pay in the form of bonuses.
The proposal on pay is the toughest since 2008, and many on Wall Street say it threatens to exacerbate a flight of talent from the banking sector to other fields such as hedge-fund firms and technology companies that have few limits on what they can pay employees.
The rules would require the biggest financial firms to defer payment of at least half of executives’ bonuses for four years, a year longer than what is common industry practice. The plan also would require a minimum period of seven years for the biggest firms to “claw back” bonuses if it turns out an executive’s actions hurt the institution or if a firm has to restate financial results.
Hedge funds and asset managers generally were excluded from the most stringent parts of the plan.
Proponents say incentives that rewarded short-term gains, without accounting for potential negative consequences, were partly to blame for the financial crisis. The provision on executive pay in the Dodd-Frank financial-overhaul law was meant to change that calculus.
Financial firms already use clawbacks, but the time period is often shorter than the proposed seven years.
The upshot on Wall Street, according to industry executives and consultants, is that top bank employees may get more of their pay in stock and salary, and less in the form of cash bonuses that are tied to incentives. In some cases, bankers could even get increases in overall pay because more is being deferred.
If federal regulators influence clawback decisions, “there’s a high probability it will drive people out of the heavily regulated part of the financial-services industry,” said Alan Johnson, managing director of Johnson Associates Inc., a compensation consulting firm that closely tracks Wall Street. To retain talent, banks and other affected institutions “will just have to pay more” due to executives’ fears that “you may have to give some of [the money] back.’’
That runs contrary to the general position on Wall Street that costs must be cut to reflect the banks’ reduced profit-making opportunities.
The proposal is the latest in a string of actions to tighten oversight on the financial-services industry as the Obamaadministration winds down, includingLabor Department rules this month that placeheightened ethical standards on brokers paid to offer retirement advice. A panel of financial regulators called the Financial Stability Oversight Council this week said it would begin to scrutinize borrowing at hedge funds, particularly large funds, as they assess potential risks in the asset-management sector.
“Congress, and the American people, want senior executives at large financial institutions held accountable if their desire for personal enrichment leads to decision-making that results in material losses,” said Rick Metsger, vice chairman of the National Credit Union Administration.
The compensation plan, in the works for five years and jointly written by six agencies, affects high-level employees at a swath of financial firms, including investment advisers, credit unions, and mortgage-finance companies Fannie Mae and Freddie Mac. The proposal divides firms into three tiers based on assets, with the stiffest rules applying to the country’s biggest banks.
The proposals on bonus and clawback periods “are more restrictive than we expected,’’ said Michael Melbinger, head of the employee benefits and executive compensation practice at law firm Winston & Strawn LLP in Chicago. He said regulators appear to have concluded that bad bets by financial-services firms take longer than three years to show up.
The effort to complete the compensation rule got a fresh push last month as President Barack Obama met with financial regulators at the White House, urging them to prioritize wrapping up rules that govern executive compensation during his remaining time in office.
New rules ought to ensure that those working for financial firms are “less incentivized to take big, reckless risks” that could harm the financial system, Mr. Obama said at the meeting.
It’s unclear how many clawbacks have been made to date on a voluntary basis. If the rules are adopted, companies would have to disclose to regulators any clawbacks.
Despite success in reviving the long-delayed compensation rule, regulators face several hurdles in completing the measure by the end of President Obama’s term in January, including political divisions and bureaucratic red tape at some of the agencies that prevented the restrictions from advancing more quickly.
In addition to extending the deferral window from an earlier draft of the proposal floated in March 2011, regulators broadened the pool of employees subject to the rules by expanding the definition of “risk taker” as the highest earners at the firms who aren’t in senior management.
At the biggest banks, that would include the 5% of employees who are the highest paid and get at least a third of their compensation based on incentives.
It would also apply to any employee who has authority over 0.5% of the bank’s capital and gets at least one-third of their pay based on incentives.
At the six biggest U.S. banks— J.P. Morgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley—5% of employees would represent nearly 52,000 workers.
It isn’t clear what percentage of those employees have at least a third of their pay based on incentives.
A bonus made up almost half of the typical Wall Street staffer’s pay in 2014, the most recent year in which data were available from the New York state comptroller.
The average Wall Street employee was paid $404,800 that year, including an average bonus of $172,900, according to the comptroller’s analysis of New York City salaries.
Banks are already laying off employees in an effort to get leaner. In the first quarter, revenue fell at five of the six biggest U.S. banks, and most have vowed to continue cutting costs. Over the past five years, those banks have eliminated more than 120,000 jobs.
The banks say they have already tightened compensation requirements in the wake of the financial crisis. But the proposed rules would for the first time require banks to adopt certain practices and expand the pool of employees who are subject to them.
Still, most bank executives said the industry will adapt to the new rules, and they expect the long-term effect to be manageable.
Citizens Financial Group Inc. Chief Executive Bruce Van Saun said bank compensation has already moved in the direction of the new proposals since the financial crisis, “so I’m not sure how much more this is going to do,” he said. He pointed to new executive compensation rules in the U.K., where, he said, “you didn’t see a mass exodus out of bank executive suites simply because they changed the rules of the game.”
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