Amiti Aitelli blog

U.S. to force Wall Street to defer half of bonuses

WASHINGTON (Reuters) – U.S. regulators will propose on Monday that executives at the largest financial institutions have half of their bonuses deferred for at least three years as part of efforts to curb excessive risk taking, according to two people familiar with proposal.

The proposal, to be unveiled at a Federal Deposit Insurance Corp board meeting, applies to top executives at financial companies with $50 billion or more in assets such as Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N).

How much of the deferred pay an executive could receive would be tied to the performance of the company based on decisions made by the executive during the period covered.

After three years the bonus pay, or incentive-based compensation, could not be doled out all at once, rather an executive could receive no more than one-third of the deferred amount in one year, according to one person familiar with the proposal.

The rule is required by the Dodd-Frank reform law and was included in response to complaints that financial institutions were paying executives based on short-term profit gains and without thinking about the long-term implications for the companies and markets.

The proposed rule will define which executives will be required to have part of their bonuses deferred.

Details of the rule were first reported by the Wall Street Journal on Saturday.

The proposal will also call for a company's board of directors to identify employees other than top executives, such as traders, whose activities could potentially endanger the institution or who pose a "material risk."

The company would then have to come up with a method of paying these employees that would limit excessive risk taking. This could include, but is not limited to, deferring incentive-based pay, according to a person familiar with the proposal.

MEASURES TAKEN BY BANKS

Many banks are already deferring pay for executives and high earners.

Bank of America, for instance, has announced that it is not increasing the base pay for Chief Executive Officer Brian Moynihan but he could receive up to $9.1 million in restricted stock units that vest in 2014, if the bank meets certain performance requirements over the next 12 months.

Robert Jackson, a Columbia University law professor, said in an interview earlier this week that despite what some banks have done on their own, the rule will set a standard for others to follow who may not be making efforts on their own to tamp down excessive risk taking.

The rule is similar to a proposal G20 leaders agreed to in 2009 on how to better align pay with risk.

That proposal suggested 40 to 60 percent of bonus pay be deferred for at least three years.

In June, a month before Dodd-Frank became law, banking regulators led by the Federal Reserve put out guidance on pay, suggesting compensation should not cause employees to take "imprudent risk" and that the board of directors should be involved in policing pay.

The rules to be released on Monday will be more specific and prescriptive.

The law requires the rule to be worked on jointly by banking regulators as well as the Securities and Exchange Commission and the Federal Housing Finance Agency, which oversees Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).

Monday's vote is only the first stage in the process and it is not clear if all the agencies or only those represented on the FDIC board will officially endorse the proposal on Monday.

One source familiar the negotiations said one agency is still reviewing the proposal and may want a few tweaks before officially giving its endorsement. The source declined to identify the regulator.

(Additional reporting by Ben Klayman; editing by Will Dunham and Mohammad Zargham)