In a comment letter to six federal financial regulatory agencies, ABA raised numerous concerns about the agencies’ proposed incentive-based compensation rule. Mandated by the Dodd-Frank Act, the proposed rule would prohibit incentive-based compensation arrangements for executives that the regulators believe could encourage excessive risk-taking behavior.
The proposed rule would apply to banks with more than $1 billion in assets, dividing banks into three “tiers” based on asset size, with the largest banks subject to the most stringent requirements. Banks with more than $50 billion in assets would be required to defer a percentage of qualifying incentive-based compensation for executives and significant risk takers for a specified amount of time. Regulators would have discretion over requirements for firms with less than $50 billion in assets.
The rule also requires institutions to keep records of senior executives and risk-takers and their compensation arrangements, and includes a "clawback" provision that allows a covered institution to recover vested incentive-based compensation if the executive or risk-taker engaged in the behavior was found to have hurt the firm.
ABA pointed out that the proposal is a poor fit with banks’ existing compensation plans and with sound risk management and government practices. The association criticized the overly broad proposed definitions of “significant risk takers” and “senior executive officers,” which it said would encompass many employees that do not make material risk decisions, while likely leaving out many employees that do make those decisions. ABA urged regulators to acknowledge on an individual basis how employees’ responsibilities and authorities are distributed in each covered bank.
The association further noted that the proposed restrictions on incentive compensation would likely serve to make banking organizations uncompetitive with non-regulated employers, a significant point of concern for an industry that is already facing a talent shortage. Moreover, the proposal would add unnecessary layers of complexity to existing compensation plans, making them more difficult to manage and explain to prospective employees, while offering no significant advantages for risk management, ABA said.
Read the comment letter.