Banking Bill's Pay Controls Cause an Uproar in Industry

WASHINGTON - A provision in the 1991 banking legislation that regulates bank officials' pay is causing an uproar throughout the industry.

Initially overshadowed by deposit insurance and other issues, the contested part of the law - in Section 132 - requires regulators to set national standards for compensation of bank presidents and directors.

The standards, which could be imposed in December 1993, may include rollbacks in the perks given top executives, directors, and even major shareholders - if regulators deem them excessive.

Critics warned that a strict pay standard applied by all banking regulators would turn the industry into a de facto public utility. And they said talented professionals and investors would be driven away from an industry that sorely needs both.

Deciding Who Gets a Car?

"It is absolutely unprecedented for there to be government intervention in a healthy, publicly held company," said Karen Shaw, president of the Institute for Strategy Development, a Washington-based consulting firm. "Is the FDIC really going to get into the business of who gets a car and whether the corporate jet comes with a flight attendant?"

"It is just another instance of nationalization of financial institutions in the United States!" exclaimed James I. Lundy of the Housley Goldberg & Kantarian law firm in Washington. "It is worse than bad."

Bank and thrift regulators already could revoke excessive compensation packages by using cease-and-desist orders under federal banking and thrift laws. Such actions were mainly limited to troubled institutions where regulators could easily demonstrate that the abuses were dissipating assets.

The new law gives regulators a lot more muscle. It not only sets the stage for compensation standards but also explicitly gives regulators authority to crack down on any federally insured institution that disobeys, regardless of its condition.

Levin Cites S&L Abuses

Sen. Carl Levin, D-Mich., wrote the provision after his Senate Governmental Affairs subcommittee studied executive compensation at banks and savings and loans.

"Compensation abuses are part and parcel of the S&L scandal and are beginning to show up in banks as well," Sen. Levin told a hearing on the provision.

Under the legislation, each federal banking agency will prescribe standards "prohibiting as an unsafe and unsound practice any employment contract with excessive compensation, fees, or benefits."

The section empowers regulators to determine whether compensation is "unreasonable or disproportionate" to services performed. Factors in making such judgments include:

* The combined value of all cash and noncash benefits provided to the individual.

* The compensation history of the individual and other individuals with comparable expertise at the institution.

* The financial condition of the institution.

* Compensation practices at comparable institutions, based upon such factors as asset size, geographic location, and complexity of the loan portfolio or other assets.

Banks Not Comparable

If an institution fails to meet the pay standards, regulators can require it to file a remedial plan within 30 days. If the institution breaks the deadline, regulators can force it to correct the problem, restrict its asset growth, and force it to add tangible equity.

Consultants and lawyers admit some abuses have existed in the banking industry, but they say problems have been few compared to those in the savings and loan industry.

Former CenTrust Bank chief executive David Paul, for instance, got $550,000 in salary in 1988, plus a $300,000 bonus and $2.76 million in CenTrust stock dividends, while the thrift was losing money, according to Sen. Levin's study.

The measure is bound to increase banks' compliance costs, but it is too early to gauge the full impact, said Ronald Glancz, head of Venable, Baetjer, Howard & Civiletti's bank regulatory practice in Washington. "This is going to be a bit of an administrative nightmare. It is going to be a field day for the consultants and the lawyers."

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