WASHINGTON — Two leading scholars on executive compensation in the financial industry called Wednesday for tougher rules on banker pay.
During a Senate hearing, both Robert Jackson of Columbia Law School and Lucien Bebchuk of Harvard Law School criticized as inadequate a proposal on executive pay that was issued last April by banking regulators.
Jackson noted that a total of 4,742 bankers at JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, Morgan Stanley and Wells Fargo received incentive pay of more than $1 million in 2008, the same year that the global financial system came apart at the seams.
He said the proposal, which were required by the Dodd-Frank Act of 2010, provides little hope that regulators will oversee the incentives of many of the bank employees who fall below the top levels of their firms but nonetheless take large risks.
"Despite the sweeping authority Congress granted federal regulators," Jackson stated in written testimony to the Senate subcommittee on financial institutions and consumer protection, "the agencies' proposal likely leaves bonuses completely unregulated for many significant risk-takers at our largest banks."
Bebchuk argued that the proposal falls short of what is necessary to correct two incentives — to focus on short-term over long-term results, and to focus on the company's common stock price at the expense of preferred shareholders, bondholders, depositors and the government in its role as guarantor of deposits — that lead financial firms to take outsized risks.
Bebchuk also argued that the regulators should bar bankers from using hedging strategies to blunt the incentives their firms have embedded in pay packages.
"What those transactions do, they simply undo whatever the firm is setting in place," Bebchuk said. "So there is very little reason to allow this to happen."
The proposal, which has yet to be finalized, aims to ban excessive incentive pay that may promote risky behavior or lead to material financial loss at financial institutions. But Jackson argued that the proposal allows for too much flexibility and punt too much responsibility to the banks.
He contrasted what he described as more forceful actions on executive pay in the United Kingdom and in Europe with the U.S. proposal.
"Our regulators have made a different decision. What they've said is identifying who those people are and regulating their pay is left to the banks themselves," Jackson said. "I can't really imagine what pay practices would change directly in response to these regulations."
The regulatory agencies, including the Federal Reserve Board and the Federal Deposit Insurance Corp., did not testify at Wednesday's hearing.
But Michael Melbinger, a lawyer at Winston & Strawn LLP, testified on behalf of the Financial Services Roundtable, an industry trade group. He argued that financial firms have overhauled their compensation practices since the financial crisis.
Relying on a 2011 survey of Financial Services Roundtable members, Melbinger stated that overall levels of compensation were down over the last few years, as were annual bonuses and golden parachutes.
"Dramatic changes in financial institutions' compensation programs since 2008 have occurred," Melbinger stated in written testimony.
Wednesday's hearing was convened by Democratic Sen. Sherrod Brown, who expressed concern over the rise in pay on Wall Street in recent decades, in an apparent effort to pressure the regulators into writing tougher rules.
"It appears that significant tools exist for regulators to put an end to runaway pay and 'heads I win, tails the taxpayer loses' compensation packages," Brown said.
Tennessee Sen. Bob Corker, the subcommittee's top Republican, pushed back against the idea that Wall Street pay remains a significant problem by noting the steps that Congress took in 2010.
"It's my understanding that that's being complied with and that it's working," Corker said. "So I'm not exactly sure what the problem is now."
