Work underway on Dodd-Frank exec pay rules

Introduction

New federal rules are on track to oversee bank executives’ pay packages and discourage them from taking unnecessary risks for short-term pay bumps, regulators assured Congress today. The coming rules, however, will not impose any specific dollar amounts on CEOs or other senior execs, they said.

The Dodd-Frank financial reform law set an April 11, 2011 deadline for bank regulators and the Securities and Exchange Commission to roll out new pay rules for banks, brokerage firms, and credit unions with at least $1 billion in assets. It also aims to force financial institutions to disclose more information about pay packages and stipulates that shareholders have a right to vote on exec compensation.

The law also gives regulators more authority to determine what kinds of incentives pose risks for the firm as a whole, and allows regulators to team up to enforce fair standards for compensation across the board.

“We’re not about micromanaging the individual pay. Process, structure leads to good results,” the Fed’s general counsel, Scott Alvarez, told lawmakers on the House Financial Services Committee. The panel, led by Chairman Barney Frank, D-Mass, called in representatives of the Fed, the FDIC, and the SEC to testify today about their progress.

(They testified about the same time as comedian Stephen Colbert finished his appearance at another hearing in the same building, and a noisy media scrum could be heard outside the committee room. Strangely, fewer journalists were as interested in financial reform.)

The FDIC is focusing on requiring big banks to defer a portion of a senior exec’s compensation and conditioning the payout on long-term results of the bank. “The full, immediate payment of an incentive compensation award may cause an employee to disregard the longer-term consequences of his or her activities that form the basis of the award,” said Marc Steckel, FDIC’s associate director of insurance and research.

Frank and some other lawmakers expressed concern that the biggest, multinational banks may find it difficult to compile pay data for senior employees in many countries. The panel’s top Republican, Spencer Bachus of Alabama, said he agrees that regulators should ensure that employee compensation doesn’t pose a systemic risk, but that regulators shouldn’t overreach.