Bank Compensation Draws New Scrutiny
The Obama administration is in discussions regarding a comprehensive overhaul of compensation practices in the financial services industry, including firms that did not receive federal bailout funds, such as hedge funds and private equity firms, according to media reports.
With the bank
over, regulators and legislators are planning to study how financial firms pay their executives and employees. The tests, whose results were released last week, examined the capital adequacy of the nation's 19 largest banks, including
Bank of America
(BAC) - Get Bank of America Corp Report
,
Citigroup
(C) - Get Citigroup Inc. Report
,
Goldman Sachs
(GS) - Get Goldman Sachs Group, Inc. Report
and
JPMorgan Chase
(JPM) - Get JPMorgan Chase & Co. Report
.
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Now, the government is looking at how to ensure that pay corroborates with a company's long-term performance and is in the best interest for shareholders, both
The New York Times
and
The Wall Street Journal
reported.
One of the primary ideas the government is considering is a set of rules that would curb pay practices that would threaten the "safety and soundness" of a bank. It is also discussing creating a "best practices" guide for banks to follow in structuring pay, the
Journal
says.
Additionally, officials are mulling expanding the powers of the
Securities and Exchange Commission
and the
Federal Reserve
to get more information regarding companies' compensation plans.
The
Times
reported that new rules could be released as early as this month.
Government officials have taken what seems to be a renewed interest in compensation practices recently.
said back in November that he was looking to realign incentives and compensation at financial institutions.
Wall Street has long been criticized for excessive pay practices, but little has been done to alter the situation. The financial crisis has put compensation in the spotlight, particularly as several large banks have had to be bailed out by the government.
American International Group
(AIG) - Get American International Group, Inc. Report
came under fire after making more than $165 million in bonus payments to executives, despite getting federal aid.
Bank of America has also been criticized by regulators and investors regarding
Merrill Lynch's
decision to pay bonuses a month earlier than usual. The Charlotte bank, which received $45 billion from the government and was recently told it needed another $34 billion in capital cushion to protect against losses, acquired the firm at the end of last year.
House Financial Committee Chairman Barney Frank (D., Mass.) is drafting legislation that would give the government more oversight regarding compensation and limit incentives or other practices that would threaten a company's viability or pose a systemic risk, the
Journal
says.
Still, any big changes to pay practices are likely to meet resistance among the banks. Banks say that they could lose top talent to other firms that are not as strictly regulated or to foreign-based firms.
Earlier this year, the Obama administration placed pay caps for top executives on those firms that received government funding from the Troubled Asset Relief Program.
The new rules would also mean additional oversight for banks looking to return TARP funds. Government regulators have called for reform for both executive pay practices and for the compensation for rank-and-file employees.
Compensation practices particularly in the mortgage industry need to be reformed so that "incentives are aligned among all parties by making compensation contingent on the long-run performance of the underlying loans," according to Federal Deposit Insurance Chairwoman Sheila Bair on Tuesday, the
Journal
reported.
