and The Conference Board Task Force on Executive Compensation
executive compensation principles.
The FDIC, led by Chairman Bair, voted 3-2 Tuesday during a contentious meeting to require those banks that don’t align their compensation system with risk management to pay a higher insurance premium to the regulator. (Read Wall Street Journal blogger Damian Paletta’s coverage
of that meeting.) “The FDIC is exploring whether the design of employee compensation programs should be considered as a factor in the risk-based pricing system,” according to a FDIC staff memo
. The memo refers to Section 7 of the Federal Deposit Insurance Act, which requires the FDIC to establish a “risk-based” assessment system for depository institutions. (Read FDIC proposal, Incorporating Employee Compensation Criteria Into The Risk Assessment System
“The FDIC seeks to provide incentives for institutions to adopt compensation programs that align employees’ interests with those of the firm’s stakeholders, including the FDIC, and that reward employees for internalizing the focus on risk management,” the memo states.
As I said, not all five FDIC commissioners are on board with this measure, which is being pitched more as a way to replenish the bank insurance fund than a way to limit banker’s compensation. The vote itself calls for a 30-day comment period before the FDIC takes any action.
What is intriguing about the timing of the FDIC vote is that President Obama Tuesday announced a plan to levy taxes or fees on large banks as a way to recoup some $120 billion in taxpayer money used to bail out banks during the financial crisis. (Read CNBC coverage
As for the proposal itself, it was refreshing to see the FDIC embracing some of the recommendations put forth by both the G-20 and The Conference Board Task Force on Executive Compensation. The proposal calls for an employee compensation program that requires a significant portion of the compensation for employees whose business activities can present significant risk be paid in “restricted, non-discounted company stock,” that significant company stock awards only become vested over a multi-year period, subject to clawback to account for the outcome of risks assumed earlier, and that the compensation program be administered by a board committee of independent directors with input from independent compensation professionals.
The Conference Board Task Force’s first principle, Paying for the right things and paying for performance, states that compensation should be aligned with an “acceptable risk profile.” It also states, “a significant portion of pay should be incentive compensation, with payouts demonstrably tied to performance and paid only when performance can be reasonably assessed.”
The Task Force’s first of its five guiding principles also says, “companies should adopt clawback policies allowing them to recoup compensation from executives under certain circumstances.”
Two of the G-20 executive compensation principles directly mention aligning risk with compensation and using clawback policies. (To read a list of the G-20 and The Conference Board Task Force principles side by side, click here
Those principles are as follows:
- · Compensation should be aligned with long-term value creation by avoiding multi-year guaranteed bonuses and requiring a significant part of variable compensation be deferred, tied to performance and subject to clawback. They should also take into account current and potential risks.
- · Financial institutions ensure that compensation of senior executives and others who have a material impact on risk exposure align with performance and risk.
Comments on the FDIC proposal can be e-mailed to firstname.lastname@example.org
or mailed to Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corp., 550 17th
Street, N.W., Washington, DC 20429. All comments received will be posted at www.fdic.gov/regulations/laws/federal/propose.html
The FDIC’s decision Tuesday on a new insurance premium model for banks falls in line with what many are saying about executive compensation: It makes sense to tie executive compensation to risk alignment.
Specifically, the decision reflects some of the tenets of the