Under major new rules being proposed under the Dodd-Frank Act, Wall Street
executives will not be able to collect bonus pay for up to four years
and may even be required to return money if their company faces extreme losses.
According to the National Credit Union Administration (NCUA), financial
institutions with assets totaling more than $250 billion would be banned
from offering bonuses that reward key employees and executives for risky
investments. The compensation regulations have been delayed but are an
important component of the Dodd-Frank financial industry overhaul. The
NCUA submitted the proposal for public comment in late April, and it is
expected that the other five agencies that must also adopt the new regulation
will follow suit.
After six years of legal work and revisions from Dodd-Frank regulators,
the proposal will provide an option for companies to force repayment of
bonuses when an employee takes a risk that is determined to be beyond
approved risk levels or causes a severe loss for the firm – even
those that have already been paid out. Under the proposal, these “clawbacks”
can occur up to seven years out, and will apply even to former employees.
The new rule seeks to remedy key issues stemming from the 2008 financial
crisis, including the way warped incentives motivated financial industry
execs and employees to expose their company to risk while attempting to
land the greatest possible payoffs. In many instances, these decisions
based primarily on obtaining a big payday, caused disastrous consequences
for some companies. Through added regulation and oversight, the Dodd-Frank
Act seeks to eradicate these skewed incentives in order better preserve
the financial system.
While the proposal would primarily take aim at top executives, other employees
who are in decision-making positions that may affect a company's bottom
line may also be held accountable. The deferral of bonuses proposed by
the new rule is based upon both the role of the employee and the assets
of the company in question. Depending on the size of the business, the
rules would allow for up to 60% of a senior officer's bonuses to be
delayed for up to four years. Firms with assets under $250 billion would
be limited to a three-year postponement of bonus money. The proposal is
limited to new plans only, leaving rules for existing plans in place.
One difficult aspect regulators had to face during the formulation of the
new proposals was the variety of pay practices utilized by the various
industries being overseen. Firms that undergo SEC regulation see asset
managers being paid based on the success of investments and scale of funds.
By contrast, compensation for bank employees typically take the form of
salaries, with additional bonus and stock awarded at the end of the year.
In 2011, after extensive criticism, an earlier version of the rules was
scrapped for the new revision. In February 2016, President Obama urged
agency heads to get the rules completed and reminded regulators that the
purpose of the rules was to discourage banks from taking large, unnecessary
risks. The new proposal is stricter than the 2011 attempt, imposing regulation
on any financial firm with assets valued more than $1 billion.
A major hurdle regulators faced was how to determine the best way to regulate
risk in an industry designed around the concept of taking significant risks.
In the wake of the financial crisis, many large banks have lay off employees,
reconsidered compensation plans, and downsized their businesses in general.
Bonuses on Wall Street are a fraction of what they used to be and are
now more performance-based than ever. The new rule will make it not uncommon
for executives waiting years for bonuses to pay out.
The proposal for the NCUA’s rule will be open to the public for comment
until July 22nd, and if approved, the new rules will go into effect roughly
a year later.
For more information or questions, please
contact Kevin Kim, Esq. at our main office line (949) 379-2600.