FDIC Proposes Limits on Banker Pay

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The federal government says excessive pay at financial institutions was one of the main causes of the recent economic crisis. It now wants to make sure bank executives and traders take less risk, by insisting they defer a large part of their compensation.

The Federal Deposit Insurance Corp. (FDIC) issued the proposed rules after a meeting on Monday. They would require top executives at major banks to defer at least 50% of their incentive compensation for three years. The proposals were part of the Dodd-Frank financial regulation bill passed last July.

Holding Big Banks to a Higher Standard

Traders who can put banks at material risk would also be required to defer a big chunk of their pay, and under a new rule they could lose that pay if the banks subsequently suffer a loss as a result of their transactions. Analysts say that part of the rule could open up a hornet's nest on Wall Street.

"Who is going to do the God-like thing and figure this out for thousands and thousands of people and tens of thousands of trades," says Alan Johnson, who heads Johnson Associates, a Wall Street compensation firm. "The problem is that half of this is about risk, and some significant portion is about politics. They have mangled it [to] where it will be a nightmare to try to actually enforce or keep track of."

The new rules also require senior executives at major banks -- with more than $50 billion in assets -- to be held to a higher standard, requiring their compensation be paid out over a long period. The idea is to make sure those executives have not subjected their institutions to unnecessary risk, although how that will be defined wasn't entirely clear. Such deferrals of 50% or more of compensation are already common on Wall Street.

"This proposed rule will help address a key safety and soundness issue which contributed to the recent financial crisis – that poorly designed compensation structures can misalign incentives and induce excessive risk-taking within financial organizations," said Sheila Bair, chairman of the FDIC, in a statement.

Delaying Payments for Traders


According to the proposed rules, which the public can comment on for 45 days, payouts for traders are to be delayed significantly beyond the period in which they earn the money. "The amounts paid are adjusted for actual losses or other aspects of performance that become clear during the deferral period," the proposal says, suggesting a form of "claw-back" rarely used on Wall Street -- because it would be so difficult to enforce legally.

Indeed, Johnson maintains that enforcing such a rule is almost impossible. For example, he says, a trader might make a loss on one trade but profit on nine others -- and those trades change in value over time until they are closed out. In addition, the company may hedge the value of the trade, so one trader's loss might actually result in a profit for the firm.

And what happens if a trader urged the company to sell a position, but it doesn't and that position loses money? Would the trader still have to lose his compensation?

"This will now encourage traders to hide the risk," Johnson says. "You're going to move that trade to somebody else, you're going to make sure that the bad stuff is not under your name." Other traders might also insist their firms close trades at the end of the year, so they don't have to keep the risk hanging over their compensation.

The proposed rules bring the U.S. into line with other countries that have also adopted bank executive compensation restrictions. Some have even set limits on the amount of compensation that can be paid, but the Obama Administration appears to have rejected those limits.

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jeffeeew

I agree, these guys rip us off every chance they get, well why not tell them that we have had enough. I know, the banks will lose talented people because of this, BULL, they were so talented that we needed to bail them out.

February 09 2011 at 6:31 AM Report abuse rate up rate down Reply
1 reply to jeffeeew's comment
Trevor

We didn't "need" to bail them out. The Foggy Bottom goons needed to confiscate the fruits of our labor. That's how goons become more powerful. Or as Rahm Emanuel put it, "You never want a serious crisis to go to waste,"

February 09 2011 at 8:31 AM Report abuse rate up rate down Reply
greekielug

pay them what ever, but tax them accordingly. 50% seems right when they "EARN" over million dollars.

February 09 2011 at 3:12 AM Report abuse rate up rate down Reply
1 reply to greekielug's comment
Camille

a million? Try more

February 09 2011 at 9:09 AM Report abuse rate up rate down Reply
alilloudernow

You guys do know that when they say excessive pay ... they mean *excessive* right? Like here's 140 million dollars...


I don't like the idea of the government stepping in... but geez.. 100+ million? a year? We could all work 1 month like that and retire.


So what do we do? You guys also know that money doesn't stay onshore either.. right?

February 09 2011 at 12:20 AM Report abuse +3 rate up rate down Reply
1 reply to alilloudernow's comment
Trevor

How can it be "excessive" if that is the amount shareholders desire to compensate them? Do you imagine others know better than you about how you allocate your resources in the same fashion as you seem to imagine you know more than others about how they allocate theirs?

February 09 2011 at 9:12 AM Report abuse rate up rate down Reply
GMC SYCLONE

Seriously, the CEO's of just about every organization are overpaid. It doesn't take one person to run a company. A company runs off of the work of a group of people. Many of these CEO's run these companies into the ground and there goes all of the investors money while the CEO runs off with millions and other benefits while the investors and the workers end up paying the ultimate sacrifice, losing their money, or their jobs. It's about time someone speaks up and says, "Wait a minute, is this pay realistic?" Pay should be based on performance and many of these CEOs have run companies into the ground. It doesn't take a rocket scientist to do that. Something that a lot of these people are missing is common sense, something they aren't missing is greed. We should all learn from the past couple of years and the predicament that these bigwigs got our country into. I hope it is a different business world for my children and that they don't have to continue to pay for the sins of the greedy.

February 09 2011 at 12:20 AM Report abuse +3 rate up rate down Reply
cartra

AS MUCH AS I HATE INVESTMENT BANKERS IT SCARES ME MORE THAT THE GOVERNMENT IS GOING TO REGULATE PAY. THE STOCKHOLDERS SHOULD DEMAND ACCOUNTABILITY ,NOT CONTROL BY THE GOVERNMENT. WE THE PEOPLE NOT THE GOVERNMENT!

February 08 2011 at 11:57 PM Report abuse +1 rate up rate down Reply
rotten rollin

Let's not forget Barney Frank's contribution to the housing bubble bust. And many, many other Democrats and some stinking RINOs.

February 08 2011 at 10:46 PM Report abuse +2 rate up rate down Reply
inventpeace

LIMITS ON ALL CEO's would make them less insulated from the plight of the many.

February 08 2011 at 10:45 PM Report abuse +4 rate up rate down Reply
Martin

Deciding the maximum amount that a private citizen may earn at a private company is NOT the role of the federal government.

Even if Obama thinks it is - he's wrong!

February 08 2011 at 10:08 PM Report abuse -2 rate up rate down Reply
2 replies to Martin's comment
gardeningatnite

Can you read? Or, do you just opinionize??......They will receive the same pay.....just delayed......because we all know about the 'fly by night' CEO's!

February 08 2011 at 10:15 PM Report abuse +2 rate up rate down Reply
Trevor

Math was never poow widdwe weeds strong suit (not that she has a strong suit)

February 09 2011 at 9:16 AM Report abuse rate up rate down Reply
imarti9625

Alrighty! Those darn bankers.....just making too much money. Now, let's include celebrities, singers, dancers, movie/tv stars, basketball players, football players, golfers and the list goes on......they get paid obscenely. Anyone for putting a cap on their salaries?

February 08 2011 at 9:43 PM Report abuse +6 rate up rate down Reply
3 replies to imarti9625's comment
Bill

I can understand why some people want no limits, but I must say it is time to limit the earnings of top people. If you think its because i want socialism, your wrong, i am a shareholder in many companies, even though i have a voice, my votes dont really count. When a CEO or any top people are paid these huge salaries, i lose more of my dividen to support it. I also think the the pay for many has gotten way out of hand.

February 08 2011 at 9:06 PM Report abuse +4 rate up rate down Reply
3 replies to Bill's comment