US regulators target incentive pay for ‘significant risk-takers’ at financial firms

Proposal would prohibit incentive-based compensation that could encourage inappropriate risks and calls for larger companies to defer parts of such payment

US regulators issued a proposal on Thursday to restrict incentive-based compensation at big financial companies and prevent executives from receiving outsized rewards for making overly risky gambles.

The Dodd-Frank Wall Street reform law, passed in 2010 after the financial crisis, calls for limits on bonuses and other results-related compensation that firms pay their top executives and other employees. Regulators first issued a proposal in 2011, and this is a modified version.

Congress, and the American people, want senior executives at large financial institutions held accountable if their desire for personal enrichment leads to decision-making that results in material losses to the institution or our deposit insurance funds, said Rick Metsger, vice-chairman of the National Credit Union Administration, which released a draft of the proposal he said spans 500 pages.

Metsger cited firms that failed during the crisis and that had rewarded senior officials based on the volume of business they generated, regardless of whether the institution subsequently made or lost money on that business.

Specifically the proposal, which was crafted by the credit union regulators and five other agencies including the Securities and Exchange Commission and the Federal Deposit Insurance Corp, prohibits incentive-based payments that could encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss, according to a summary from the NCUA.

Most of the proposal is aimed at firms with $50bn or more in assets.

Larger companies would have to defer parts of incentive compensation for some senior officers and those considered significant risk-takers, pushing off payments of cash and equity for a number of years. They would also have to include forfeiture and claw-back provisions for some compensation, which could be triggered by poor financial performance attributable to deviation from the companys policies, inappropriate risk-taking, or not complying with federal and state laws.

The proposal defines a significant risk-taker as someone among the top 5% or top 2% of a firms highest-compensated workers, depending on the firms size, or someone who has authority to commit or expose 0.5% or more of the capital of a firm.

There is only one credit union with over $50bn in assets, said NCUA board chairman Debbie Matz, adding the proposal would not be retroactive to existing compensation plans.

The plan would not become final for months. A public comment period ends in July.

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