Incentive-Based Compensation: Better never than late?

By David Baumann, Editor, Washington CU Daily

Stop me if you’ve heard this one before.

On second thought, don’t.

For the third time, federal banking regulators have issued a proposed rule governing incentive-based compensation practices at financial institutions.

That rule, required under the Dodd-Frank Act, was supposed to be issued in May 2011. The banking regulators, including the NCUA, issued proposed rules in 2011 and 2016, but they were never finalized. The regulators apparently were so fond of the 2016 proposal, that they simply reissued it as a new proposed rule earlier this month.

This time, however, the NCUA has not yet signed onto the new rule. The agency has not given any reason why officials have not signed on yet, but it could have something to do with Chairman Todd Harper taking a temporary leave of absence to have and recover from back surgery.

The proposal includes provisions to make incentive-based compensation deals at credit unions and banks more sensitive to risk. The rule would apply to financial institutions with more than $1 billion in assets.

The rule would prohibit incentive-based pay arrangements that don’t include “risk adjustment of awards, deferral of payments, and forfeiture and claw-back provisions.”  The proposal, according to the agencies issuing it is designed to “help safeguard covered institutions from the types and features of incentive-based compensation arrangements that encourage inappropriate risks.”

The proposal does not point any fingers at a specific financial institution, but members of Congress cited last year’s failure of Silicon Valley Bank as evidence demonstrating that the new rule is needed.

“The recent bank failure of Silicon Valley Bank and reported bonuses issued to its leadership further underscore the urgency and importance of this rule’s implementation,” Sen. Gary Peters, D-Mich., wrote in a letter to regulators last year.

Financial services trade groups opposed the 2016 rule and likely would oppose the new one, since it essentially is identical.

What credit union groups have said

Credit union trade groups in the past have sharply criticized the proposed rule.

“Our association members consider this potentially far-reaching regulatory proposal to be absolutely unnecessary and a complete over-extension of the mission of the NCUA, even including our state-chartered credit unions which the NCUA does not directly regulate,” John Bratsakis, president/CEO of the MD|DC Credit Union Association, wrote, in commenting on the proposal when it was issued in the past.

He said that the proposal’s most glaring omission was the lack of a cost-benefit analysis that would have allowed credit unions to fully assess the impact of the rule. He went on to write that the NCUA should withdraw the proposed rule, and instead, issue guidance on the issue.

Paul Gentile, who was then president/CEO of the Cooperative Credit Union Association, also saw little to like in the 2016 proposed rule.

“While the proposal of an incentive-based compensation arrangement rule is well intentioned, the Association is of the position that the proposal overreaches in its scope and contains too much ambiguity and too many problematic provisions,” he wrote. “As such, the Association does not support any aspect of this proposal, and requests that the respective agencies retract this proposal and reconvene to consider a potential path forward for any incentive-based compensation rule.”

Jim Nussle, who was then president/CEO at CUNA also blasted the 2016 proposal.  “We are very concerned that the incentive-based compensation rule gives the NCUA far too much supervisory authority over how credit unions pay their employees,” he said.

On the other hand, some progressive groups said the 2016 proposal did not go far enough.

“The 2016 proposal came close to needed reform,” said Bartlett Naylor, financial policy advocate at Public Citizen. “It required deferral of a significant portion of senior banker pay subject to forfeiture in the event of misconduct or other inappropriate banking decisions but left the forfeiture up to management. Forfeiture must be mandatory. Bankers who screw up aren’t going to dock their own pay.”

Another consumer advocate blasted the agencies for waiting so long to issue a new proposal.

“The directive from Congress to write this regulation has been in statute for almost 14 years, and while we waited, the country experienced another banking crisis last year, and misaligned incentive compensation was once again a contributing factor,” said Natalia Renta, Senior Policy Counsel for Corporate Governance and Power at Americans for Financial Reform Education Fund.