Banking Law

Sheila Bair publicly aligned herself with Barney Frank today on the need for curbs on executive compensation, which comes as absolutely no surprise to anyone who has watched her consistent maneuvering to please the radical left faction of the Democratic Party in Congress since before last year's presidential election to the present. In an interview aired today by Bloomberg Television, Ms. Bair "said regulators should set standards for U.S. banks to ensure incentives encourage long-term performance."

Banking agencies should become more active in setting compensation standards that are ?principles-based? without setting specific amounts for pay, Bair said today in an interview with Bloomberg Television in Washington.

?We do need to revamp the system to make sure that the incentives are long-term,? Bair said. ?I do wish some of these firms would exercise better restraint and common sense on what they?re paying their folks.?

[...]

"I?m not sure I buy this that all these eye-popping salaries are necessary to keep folks for competitive reasons,? Bair said. "At some point, it just becomes a little beyond the pale in terms of questioning what value is added for those types of eye-popping salaries."

The federal banking agencies' Interagency Guidelines already prohibit the payment of "excessive compensation" by banks to their executives. Appendix A  to 12 CFR Part 364 provides, in pertinent part, as follows: 

III. Prohibition on Compensation That Constitutes an Unsafe and Unsound Practice

                                A.  Excessive Compensation

     Excessive compensation is prohibited as an unsafe and unsound practice. Compensation shall be considered excessive when amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder, considering the following:
1. The combined value of all cash and non-cash benefits provided to
the individual;
2. The compensation history of the individual and other individuals with comparable expertise at the institution;
3. The financial condition of the institution;
4. Comparable compensation practices at comparable institutions,
based upon such factors as asset size, geographic location, and the complexity of the loan portfolio or other assets;
5. For postemployment benefits, the projected total cost and benefit to the institution;
6. Any connection between the individual and any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the institution; and
7. Any other factors the agencies determines to be relevant.

                    B. Compensation Leading to Material Financial Loss

      Compensation that could lead to material financial loss to an institution is prohibited as an unsafe and unsound practice.

Please note that the federal banking agencies already have the ability to take into consideration any factors they deem relevant in determining whether or not compensation of an employee of an insured institution is "excessive." That would include whatever will be the legalese translation for the terms "beyond the pale" and "eye-popping." They've used that power to hammer banks when they believed that certain employees were being paid excessive amounts of compensation.Thus far, however, they've usually deferred to independent experts, retained by the bank, to determine what is and is not "excessive" compensation in any specific case where the level of compensation is considered to be excessive. 

I assume that what Ms. Bair and her allies on the left now want to do is to have the banking regulators set froth in more detail "principles" that must be followed in setting executive compensation, rather than leave it to the marketplace to determine the "reasonableness" of an executive's compensation in light of all relevant factors in each individual case. I anticipate that those "principles" might well include limits on the percentages of bonuses and similar forms of compensation in relation to base salary; more specific guidance on the tolerance levels for disparity of income between the chief executive officer and other senior bank officers (a factor already considered generally by bank examiners to smoke out undue dominance by a CEO); severe limitations on (or the outright prohibition of) the payment of bonuses in years when the bank isn't profitable; banning certain types of bonus formulas that the regulators deem to encourage excessive risk taking or short-term over long-term profitability. In other words, the banking regulators will encroach upon the prerogatives of each bank's board of directors.

Then again, when it comes to determining what's fair and reasonable to a business, who better to make the call than people who've never spent a day actually running such a business?