WASHINGTON – Long-dormant efforts to restrict Wall Street pay are back on the agenda as regulators turn to unfinished business left over from the 2010 financial overhaul.
Banking regulators are discussing reviving a proposal that would require big banks to defer some compensation for executives and to take back more of their bonuses if losses pile up at a firm, according to people familiar with the matter.
The talks are in early stages and involve top officials from at least three bank regulators: the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Reserve, the people said. Some bank executives are open to having the agencies write a new version of the rules, betting the limits would be milder during the Trump administration than if a Democrat takes the White House in 2020.
The rules are required by the 2010 Dodd-Frank financial law, a fact bank regulators have pointed to as they begin work on a new rule. Twice proposed during the Obama administration, they weren’t completed earlier in part because of industry pushback. The industry had opposed the scope of the latest proposal from 2016 – which extended to rank-and-file employees – saying it should have been limited to top executives.
Spokesmen for the Fed and OCC said their agencies are committed to finishing the incentive-compensation rule. An FDIC spokesman declined to comment. The Securities and Exchange Commission and two other regulators would have a vote on any new proposal.
Banker pay became a lightning rod during the financial crisis. Critics blamed executives’ upfront cash bonuses for encouraging risky, short-term bets that contributed to the crisis. President Obama called the billions in bonuses that firms paid in 2009 shameful.
The Dodd-Frank law, passed a year later, mandated new rules to limit payouts and more closely align them to firms’ long-term financial health. Pay fell sharply in the postcrisis years, in part because of this backlash and in part because bank profits sank.
As those profits have rebounded, pay is starting to tick back up, although pressure from shareholders has led banks to replace big cash bonuses with more stock awards and performance-based metrics.
When last proposed in 2016, the rules would have required the biggest financial firms to defer payment of at least half of executives’ bonuses for four years, a year longer than common industry practice. It also would have established a seven-year clawback period, in which executives would be required to return their bonuses if their actions hurt the institution or if a firm had to restate financial results.
The idea behind deferring pay, or holding it back from employees for three years or more, is that employees will have more of an incentive to work for the long-term interest of the company.
Alan Johnson, a consultant who helps banks design their pay plans, said much of what regulators had hoped to accomplish with the pay rules is already a reality. Today’s bankers and traders are paid less than a decade ago, and banks have curbed the riskiest kind of trading and lending that drove losses during the meltdown.
“I think the regulators are going to refight a war they’ve already won,” Johnson said.
Banks say they have already tightened compensation requirements. Since 2009, Goldman Sachs Group Inc. employees have received a single year’s worth of share-based compensation over three years, as opposed to all at once, and they can’t sell the stock for five years. Goldman employees took home 33 cents of every dollar in revenue last year, down from 44 cents in 2006.
That belt-tightening, though, has been overshadowed by raises for top executives. JPMorgan Chase & Co. CEO James Dimon was paid $31 million in 2018, the first executive to crack the $30 million line since the crisis. The CEOs of the five biggest Wall Street firms received, in aggregate, a 7% pay raise last year.
Securities firms paid an estimated $31.4 billion in bonuses in New York City in 2017, the highest level in a decade, according to the state comptroller.
Any new rules could for the first time require banks to adopt certain practices and likely expand the pool of employees who are subject to them.
Enactment of the pay restrictions would add a regulation at a time when Trump-appointed regulators have sought to ease some rules. They have, for instance, proposed softening restrictions on securities trading and taken steps to lighten the compliance load on midsize banks. Banks are more closely regulated, better capitalized and healthier than a decade ago.
One of the reasons earlier versions of the compensation rule never got across the finish line is that the six regulators involved in the process haven’t always seen eye-to-eye on pay restrictions. Any new rule would involve the SEC, the three bank regulators, as well as the Commodity Futures Trading Commission and the National Credit Union Administration.
Regulators were unable to complete the unwieldy regulation in the waning days of the Obama administration, despite a push to wrap it up in the weeks after the 2016 election.