High fees for risky compensation
(18 January 2010 – USA) While the US Congress continues to investigate the economic meltdown and scrutinise decisions made by top executives, the Federal Deposit Insurance Corporation (FDIC) has voted for a preliminary staff proposal that could see US banks paying higher fees for risky pay practices.
The FDIC’s proposal, would use scaling of the deposit insurance fee to provide an incentive for banks to adopt compensation programs, that align employees’ interests with those of the firm’s stakeholders, including the FDIC.
The model indicates that the proposal would favour financial institutions that pay employees, that make high risk decisions, with a large portion of their salary in restricted, non-discounted company stock. The stock given to the employees can be taken back by the institutions in certain circumstances.
While the proposal is not designed to limit bank employees’ earnings, it is designed to encourage less risky practices, FDIC, chairwomen, Shelia Bair highlighted.
Of the issues to still be determined is whether the compensation rule will just apply to bank employees or staff at the financial holding companies, as well and how the legal department will apply the rules to both publicly traded banks and private community firms.
The proposal raises the question of whether to use deposit insurance fees as an incentive to encourage compensation practices that favour less-risky behaviour and if firms with ‘good’ pay structures should be rewarded with lower fees.
The meeting amongst the board was met with some internal debate, two members of the board voted against the proposal going ahead to the preliminary stages.
The Comptroller of the Currency, John Dugan, said that he had substantial concerns about the proposal, particularly at a time when congress is expected to address compensation on a broader level.
It would be very unfortunate to have an end result where insured institutions were subject to inconsistent schemes evaluating the risk of their executive compensation programs, Mr Dugan added.
The staff said the new proposal, which will be put out for public comment, is meant as a complement to other government efforts to address concerns about executive compensation practices in the financial services industry.
The model indicates that the proposal would favour financial institutions that pay employees, that make high risk decisions, with a large portion of their salary in restricted, non-discounted company stock. The stock given to the employees can be taken back by the institutions in certain circumstances.
While the proposal is not designed to limit bank employees’ earnings, it is designed to encourage less risky practices, FDIC, chairwomen, Shelia Bair highlighted.
Of the issues to still be determined is whether the compensation rule will just apply to bank employees or staff at the financial holding companies, as well and how the legal department will apply the rules to both publicly traded banks and private community firms.
The proposal raises the question of whether to use deposit insurance fees as an incentive to encourage compensation practices that favour less-risky behaviour and if firms with ‘good’ pay structures should be rewarded with lower fees.
The meeting amongst the board was met with some internal debate, two members of the board voted against the proposal going ahead to the preliminary stages.
The Comptroller of the Currency, John Dugan, said that he had substantial concerns about the proposal, particularly at a time when congress is expected to address compensation on a broader level.
It would be very unfortunate to have an end result where insured institutions were subject to inconsistent schemes evaluating the risk of their executive compensation programs, Mr Dugan added.
The staff said the new proposal, which will be put out for public comment, is meant as a complement to other government efforts to address concerns about executive compensation practices in the financial services industry.
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