Tucked into proposed legislation that would place new compensation regulations on top corporate executives, Rep. Barney Frank, D-Mass., has specifically called for financial institutions to adhere to stricter executive pay programs that could potentially be subject to government approval.
He has made broker-dealers, investment advisers, banks and credit unions targets for additional compensation reforms in a proposal that he introduced to the House of Representatives last week.
“These financial institutions are the capital engines that drive our economy and manage our wealth,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware in Newark. “So anything that can directly influence the success or failure of their businesses will be a logical target for lawmakers — and for better or worse, that means executive compensation.”
Mr. Frank's proposal — which could go to the House floor for a vote as early as this Friday — would require publicly traded brokerage firms and advisers to disclose more-precise information about how their top executives' annual bonuses and incentives were determined each year. At the same time, his proposal would allow federal regulators to prohibit financial institutions from awarding executives incentive payments that “encourage inappropriate risks” and could have “serious adverse effects on economic conditions.”
It is a broad suggestion, of course, that lacks specific definitions at the moment, observers said. But if adopted, such regulations potentially could impair the ability of publicly traded broker-dealers and investment advisers to attract and retain top talent, they said.
“There's already a massive shortage of talented executives in these industries,” said Mark Elzweig, president of an eponymous New York-based executive search firm. “But this could make privately owned or foreign players more attractive landing spots for top talent, if they're not subject to the same scrutiny over compensation.”
Steve Adamske, a spokesman for Mr. Frank, noted that other countries, such as the United Kingdom, have similar compensation laws, and refuted that the proposed legislation would have a negative impact on publicly traded financial firms' recruiting and retention efforts.
“But if there's an exodus of executives that have overleveraged the companies they've run, or undercapitalized their companies, then so be it,” Mr. Adamske said. “Compensation certainly played a role in the lead-up to the financial crisis,” he added. “And we need to have safeguards in place to protect investors, shareholders and taxpayers.”
On the surface, however, some said, the proposal — which will be marked up by the House Financial Services Committee this week — has the potential to translate into lower overall payouts to executives at financial institutions.
“More than any other industry, their pay is determined by incentives and bonuses,” said Steven Hall, managing director at a New York-based compensation consulting firm bearing his name.
“So just the perception that their incentive payments could be limited by regulators — in any capacity — will give many executives at publicly traded financials a reason to consider making a move.”
Indeed, chief executive officers at large financial institutions earned a median of 71.4% of their compensation from incentive payments, even in a year where financials substantially underperformed the markets, according to data from the Equilar Inc., a compensation research firm in Redwood Shores, Calif.
The typical CEO at a large company, meanwhile, saw just 70% of his or her total pay come from incentive payments and bonuses.
Mr. Frank's proposal — a draft of which was first circulated July 17 — doesn't include specific limits on compensation for executives at financial institutions. Rather, experts noted, it attempts mainly to give shareholders and legislators a clear picture of the risk-reward relationship that fuels these executives' compensation packages.
“They want to know if you're incentivized to swing for the fences, basically,” said Peter Oppermann, a senior executive compensation consultant at Mercer LLC in New York. “If there's too much emphasis on short-term performance, that could expose shareholders, and of course the company itself, to more risks than they realize.”
This, compensation experts said, likely will lead more publicly traded brokers and investment advisers to award their top executives bonuses — as well as signing bonuses when recruiting executives — that are based on a broad mix of long-term performance goals. They also likely will replace cash bonuses with more restricted stock awards that vest over a period of several years, said Alexander Cwirko-Godycki, senior research analyst at Equilar.
“Executives won't be focused on any one particular goal anymore, such as their company's stock price,” he said. “Stock price will still be a piece of it, but sustainable earnings and profits will likely play a larger role in shaping their compensation packages moving forward.”
Mr. Frank's moves to examine pay at the top of the brokerage and advisory communities come shortly after the Obama administration zeroed in on the compensation of the brokers and representatives in the industry.
The administration proposed that the Securities and Exchange Commission “would be empowered to examine and ban forms of compensation that encourage financial intermediaries to steer investors into products that are profitable to the intermediary but are not in the investor's best interest,” according to a statement issued by the Department of the Treasury on July 10.
“The federal government is making it quite clear, on every level, that they're insistent upon protecting individual investors and shareholders,” said Andy Tasnady, founder of Port Washington, N.Y.-based Tasnady & Associates LLC.
E-mail Mark Bruno at [email protected].
