Financial Services Industry Compensation Rules

HR Policy Association in conjunction with the Center On Executive Compensation believe that executive compensation arrangements should be disclosed and explained in a clear, concise manner that is customized to the company so that the disclosure facilitates a full understanding of the link between pay and performance and the rationale for the particular executive compensation structures and amounts.  In response to the financial crisis, Congress and regulators swiftly enacted a number of measures aimed at the financial industry that would curb perceived compensation abuses, mitigate risk with respect to incentives and prevent the payment of excessive compensation.  Section 956 of the Dodd-Frank Act requires a consortium of federal financial agencies to jointly promulgate rules covering incentive-based compensation that would discourage individuals from taking inappropriate risks that could lead to a material financial loss in addition to issuing special rules governing financial institutions with over $1 billion in total assets. The Center believes that many of these proposed rules were too broad and unnecessarily transfer board authority to the government with respect to the strategy, compensation and oversight of financial institutions.  For this reason as well as the burdensome reporting requirements that were in the proposed rule, we are concerned that this provision may lead to a one-size-fits-all approach to enforcement.  The Center continues to believe that the board of directors elected by the company’s shareholders should maintain responsibility for structuring compensation in order to attract, retain and motivate employees to manage the company with care and to produce sustained creation of shareholder value.  The Center agrees that more robust risk management and mitigation practices related to compensation should apply to the financial industry because of the unique characteristics and structures of the industry.  The board’s compensation actions should be tailored to each company’s unique recruitment, talent management and overall business strategies and should include oversight of management risk committees that include individuals familiar with the specific risks posed by different trading and investment strategies.