The Federal Reserve’s new pay rules for banks are coming into better focus. Its general counsel, Scott Alvarez, was on Capitol Hill explaining how the rules, announced last October, are developing. He sought to draw distinctions between how the rules would affect small banks, big regional banks and the biggest firms. Here’s how he broke it down:
Big Firms, focus on deferred compensation and clawbacks: “It is clear that substantial changes at many firms likely will be necessary to fully conform their practices with principles of safety and soundness. For example, at many firms, the measures and systems needed to make the incentive compensation of non-executive employees appropriately risk sensitive are not well advanced. And, in some cases, the deferred compensation of senior executives is still not subject to downward adjustment based on the full range of potential risks facing the organization, such as liquidity or operational risk. In addition, few firms have processes in place that would allow them to compare incentive compensation payments to risk and risk outcomes.” He addes he expects, “significant progress to improve the risk sensitivity of incentive compensation at [these firms] for the 2010 performance year.”
Smaller banks and regional banks, going light on the little guys:
“Examiners will gather a consistent set of information through regularly scheduled examinations and the normal supervisory process. Information collected from regional organizations will encompass information on their incentive compensation practices and related risk-management and corporate governance processes. The focus of the data collection effort at community banks will be to identify the types of incentive plans in place, the job types covered, and the characteristics, prevalence, and level of documentation available for those incentive plans … After comparing and analyzing the information collected, supervisory efforts and expectations will be scaled appropriately to the size and complexity of the organization and its incentive compensation arrangements. For example, a large regional organization that uses incentive compensation arrangements extensively may require additional supervisory work to understand and assess the consistency of the organization’s practices with principles of safety and soundness. If practice is as expected at community banks, it is likely that very limited, if any, targeted examination work or supervisory follow-up will be required.”