Center Urges the SEC to Take Board-Centric Approach to Financial Incentive Compensation Rules

June 03, 2011

The Center On Executive Compensation filed comments this week with the SEC and other financial regulators expressing concern that the proposed rules limiting incentive-based compensation under Dodd-Frank shift Board authority to federal bureaucrats.  The proposed rules implement Section 956 of the financial reform law, which applies to financial institutions with more than $1 billion in assets and prohibits incentive compensation that would encourage inappropriate risk by providing excessive compensation or that could lead to material financial loss.  The rules allow the regulators to: 1) determine whether, for covered financial institutions, incentive plans applicable to senior executives and employees with significant discretion in dealmaking are excessive and, 2) prohibit those arrangements the agencies determine to be inappropriate.  The rules also require financial institutions with more than $50 billion in assets to defer 50 percent of annual incentive compensation for senior executives over three years.  The Center’s comments warn that “the regulations would effectively require the Agencies to take on the role of shadow compensation committees to review, assess and compare compensation at each covered institution for those employees who engage in transactions that may impact the company as a whole.”  Accordingly, the Center urged the agencies to revise the regulations to accommodate the variability and differences among firms and business models.  The comments also state that the rules should afford Boards the flexibility to tailor their own approach to risk mitigation and compensation design, consistent with sound risk mitigation principles, such as those contained in the Center’s risk checklist.  Although the rules only apply to large financial institutions, as was seen with the TARP program, pay restrictions may spread to other industries or all companies over time.  The restrictions will take effect six months after the final rules are published.