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Regulators Get Banks to Rein In Bonus Pay

Source: WSJ - Aaron Lucchetti

Posted on 23 Apr 2013 by Neilson

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Bank payU.S. banks are bowing to regulators' concerns about the size of executive pay and its role in financial industry risk-taking.

Seven large U.S. financial-services firms, including PNC Financial Services Group, Capital One Financial Corp., and Discover Financial Services Inc.,  said they are scaling back the maximum bonuses awarded to executives who beat their performance targets, according to regulatory filings.

Late last year, the Federal Reserve began contacting banks about their compensation plans, said a person familiar with the phone calls. In regulatory filings, many of the firms cited the Fed as a reason for changes.

Since the financial crisis the Fed has urged banks to cap bonuses in cases where they could encourage executives to take too much risk. Before the crisis, banks erred by focusing too much on short-term profits and too little on risk when designing bonus plans for employees and executives, according to the Fed.

While the moves involve bonuses for exceeding internal financial targets and not basic pay packages, they are the latest hit to Wall Street compensation, which has shriveled in recent years because of smaller bonuses and poor stock performance. A study earlier this year by New York State Comptroller Thomas DiNapoli showed that Wall Street bonuses in 2012, while up from the previous year, were down about 40% from 2006.

he new scrutiny comes as European regulators move ahead with a plan finalized last week to cap bankers' short-term cash bonuses at twice the base salary. Banking executives in Europe already are preparing for the changes, with some considering boosting salaries to make up for the lost bonuses.

The moves show that, five years after the financial crisis, regulators are still looking at ways to lower risk in the banking system, even if it means interfering with private pay practices.

"The Fed wants to ensure that excessive risk-taking is not encouraged in these structures," said Mark Williams, a former Federal Reserve bank examiner who now teaches at Boston University.

Some shareholder groups question the trend, arguing that executives' incentives should be aligned with those of investors, who want companies to perform as strongly as possible. "There is some tension between the Fed's focus, which is on risk mitigation, and the focus of investors," said Carol Bowie, a senior research executive for Institutional Shareholder Services, an advisory firm.

Investors who own bank shares want the companies to take "reasonable risks," she said, because that is an important ingredient in making bank stocks rise. Some banks might use the Fed's guidance to replace performance-based pay with fixed salaries that could reward sluggish performance, said Ms. Bowie.

BB&T Corp., KeyCorp, U.S. Bancorp and SunTrust Banks Inc. are the other U.S. firms that cut their maximum performance-based bonuses recently, according to a study set to be released as early as Tuesday by pay-consulting firm Compensation Advisory Partners. The study examined practices at 23 of the largest financial-services firms.

Seven firms kept their performance programs the same as last year, according to the study. Eight others didn't have a plan last year. One securities firm, Morgan Stanley, increased the maximum performance payout after reducing it a few years ago, according to the study's authors. The report points out that Morgan's payout couldn't increase if the company's shareholders experienced a loss.

Typically, the plans promise to give top executives a certain number of shares if they meet their targets over several years, and to give them more if they exceed their targets, up to a limit.

In many industries, such as technology and manufacturing, companies commonly set limits of 200% of the target bonus, said Rose Marie Orens, a senior partner at Compensation Advisory Partners and one of the authors of the study. So executives set to receive, 10,000 shares, for example, could receive up to 20,000 shares if they exceed their performance targets.

But the Fed grew concerned that the programs were too sweet for big banks. Last year, it urged certain financial-services firms to cap bonuses at a lower multiple of the target payouts, usually 125% or 150% instead of 200%, according to a person briefed on the Fed's work.

According to the survey, five of the 23 banks recently disclosed that they awarded their executives with an incentive plan in which the stock or cash received would double over time, as long as the executive reached certain performance goals. In the previous reporting period, eight of the banks had such plans.

This year it was more common to give executives 125% or 150% of their target award for hitting or exceeding certain goals, the study said. Banks in that category increased to 14 from six last year. Some of the largest banks, including Bank of America Corp., Goldman Sachs Group Inc. and Wells Fargo  & Co. were in that category for both time periods, the study said.

PNC reduced the payout to 125% of the target award, then approved $2 million for an additional compensation pool to be divided among the affected executives. Spokespeople for PNC and BB&T declined to comment.

A SunTrust spokesman said the bank reviews its executive compensation programs each year "to ensure the executive compensation programs are competitive with the market and aligned with the interests of our shareholders."

A spokesman for U.S. Bancorp confirmed the numbers. A spokeswoman for KeyCorp said the numbers in the survey related to the firm's short-term incentive plan.

A Discover spokesman declined to comment. In its 2013 proxy filing, Discover said that it "reduced the upside" in its performance plan "to further inhibit excessive risk taking." It noted that the "further strengthening" of "risk-balancing features" was "consistent with guidance from the Federal Reserve."