Compensation Practices at Financial Institutions Targeted: Proposed Incentive Compensation Rules Aim To Curb Excessive Risk-Taking

26 April 2016
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Key takeaways

  • U.S. financial regulatory agencies have been working together since 2011 to issue regulations under Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to curb excessive compensation practices that many believe led to the 2008 financial crisis.  Last week, the National Credit Union Administration released revised proposed rules that provide a preview of what to expect from the other agencies.
  • The proposed rules aim to prohibit covered financial institutions from providing incentive compensation arrangements that encourage “inappropriate” risk-taking (1) by providing “excessive” compensation or (2) that could lead to material financial loss.
  • A new tiered framework tailors prohibitions to the size of a covered financial institution, with more stringent requirements applying to the largest institutions. These requirements include: deferral of payment of 40-60% of short and long term incentive compensation for 3-4 years after the end of the relevant incentive performance period (1-2 years for compensation with performance periods of 3 years or more), subject to possible forfeiture should failings in risk management or financial problems emerge over time; prohibitions on accelerated vesting of deferred awards; and a new seven-year post-vesting clawback on incentive compensation.
  • Both financial and nonfinancial risk-based measures would be required to be taken into account in determining incentive-based compensation for all employees, with requirements to downwardly adjust compensation for risk failures.