News (Stay Informed)

Regulators overhaul upfront

cash bonuses from big banks.

by Wall Street Journal:

U.S. regulators are considering whether to require large financial firms to hold onto a chunk of executive pay to discourage the excessive risk-taking that contributed to the financial crisis, according to people familiar with the situation.

The discussions by the Federal Reserve, Securities and Exchange Commission and other federal banking agencies are the result of a provision in the Dodd-Frank financial-overhaul law that instructs regulators to prohibit any bonus plan that “encourages inappropriate risks” at financial firms with more than $1 billion in assets.

The idea behind deferring pay, or holding it aside for three years or more, is that employees will have more of an incentive to work for the long-term interest of the company.

The moves being considered by regulators would require such practices from a wide cross-section of banks, brokerage firms and investment managers for the first time.

Fed officials recently sent letters to big banks suggesting improvements in how compensation is structured for both highly paid traders and lower-paid employees such as loan officers, since both groups can contribute to huge losses.

Fed officials also are considering whether to recommend to banks specific compensation practices, such as awarding so-called performance-based shares, where the number of shares granted can change in the future depending on an employee’s performance.

On Friday, the U.K.’s Financial Services Authority announced its version of the European rules starting next year, the European rules limit the amount of certain bonuses that can be paid immediately in cash to 20% of the overall payout, meaning the rest must be a mix of upfront shares and deferred pay.

One reason European regulators have been tougher on pay than their U.S. counterparts is that they have blamed eye-popping paychecks for causing some of the worst losses during the crisis.

In contrast, U.S. officials have largely stressed the need to make banks safer overall, pursuing a wide variety of measures that include pay changes.

Wall Street Journal

Finally, regulation at last. Banking executives should be rewarded by performance, not who has the highest job title. Loan officers played a role tool in the financial system and should be rewarded properly for their performance. Just as investment bankers and bank execs. should be paid less in bonuses if their risky behavior did not pay off well for the bank’s books. And providing more bonuses in shares for the company would indeed provide an incentive for long term great performance.

It’s just sad that a lot of good people had to lose their homes because of the risks taken in such a loosely regulated market.