Don’t hold your breath for an executive compensation rule
WASHINGTON — If federal regulators are any closer to finishing a rulemaking on incentive-based compensation plans, it's not a moment too soon. The Dodd-Frank Act required them to finish it almost eight years ago.
Through that lens, published reports that officials have renewed their interest in the embattled rule could be greeted as welcome news. But renewed interest alone would not be enough for regulators to overcome the substantial logistical and practical obstacles that have hindered the rule for so long.
After the financial crisis, lawmakers were concerned that compensation plans incentivized financial executives to maximize short-term profitability over a firm’s stability. Dodd-Frank sought to reduce that risk by requiring more transparency around executive compensation and prohibit incentive-based compensation structures that foster excessive risk-taking.
The six agencies tasked with implementing that provision — the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Securities and Exchange Commission, National Credit Union Administration and Federal Housing Finance Agency — have already issued two proposals, once in 2011 and again in 2016.
Each of the two iterations was criticized from all sides — financial companies thought they were overly complicated and burdensome, while Wall Street watchdogs said they were weak and ineffective. With that kind of reception, one could forgive regulators for wanting to let this rule fall by the wayside.
Even now, regulators seem pretty lukewarm, at best, about whether there has been any progress.
"I don't know that there is that much movement on it," said FDIC Chairman Jelena McWilliams, speaking to reporters earlier this week after giving a speech.
"I have no comment really on it because we have not taken a deep dive on what to do, how to do it, who would do it, who would hold the pen, how this would be done," she said.
A Fed spokesperson said the agency was "committed to completing the incentive compensation rule," but Fed Vice Chairman for Supervision Randal Quarles told the Senate Banking Committee last year that he did "not have a time frame" on when it might be complete.
Another main reason why there has been little momentum to complete the executive compensation rule is that, for various reasons, many of the most obvious provisions have become standard practice in the financial industry since the crisis.
Clawbacks — a provision whereby compensation is taken back from an executive if malfeasance later comes to light — are widely used, partly because they were required as a condition for banks to receive Troubled Asset Relief Program funds. Such provisions are no longer required, with the winding down of the bailout program, but they are common throughout the financial industry.
Bank regulators and the SEC also issued guidance in 2010 that suggested firms be risk-sensitive in their compensation packages, and the SEC unilaterally issued a so-called “say on pay” rule in 2011 that effectively expanded disclosures of executive pay and pay mechanisms. A more recent SEC rule requires financial firms to disclose their executives’ compensation and how they compare to lower-level employees — a move that could also create new pressure for boards to weigh executive compensation limits.
Shareholder proxies have also played a major — and often underappreciated — role in bringing compensation plans in line with post-crisis standards while making such practices as stock options and “gross-ups” that were once commonplace far rarer.
Perhaps the main reason regulators haven’t gotten around to completing the executive compensation rule is that it is a joint regulation between six very different agencies with very different agendas. Because it is a joint regulation, the ultimate product has to be approved by consensus. That’s just hard to do, and even trying absorbs a great deal of each agency’s finite resources.
SEC Chairman Jay Clayton, perhaps sensing the density of the task of completing the executive compensation rule, downplayed expectations when speaking to an international bankers conference on Monday.
“I would put more certainty around the SEC-only items that are on our agenda,” Clayton said. “That’s just the way the world works. But I’m open. I can’t promise that we’ll get things done, but I’m open to thinking about it.”
Still, the fact that companies are essentially self-policing their compensation practices through the influence of institutional investors and other shareholders means those practices could loosen up again during a future economic cycle. Regulators may be better positioned over the long term to ensure that a firm's profitability does not come at the expense of financial stability.
And if regulators want to influence bank culture, an executive compensation rule is one of the few mechanisms that regulators have to do so. Quarles told the Banking Committee last year that he views bank culture as important, but ultimately something that he as a regulator has limited power to control directly.
But none of the obstacles that have kept regulators from completing an executive compensation rule have gone away. Reviving focus on a rulemaking now would not make it any easier to complete.
Rachel Witkowski contributed reporting.
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