Fed Moves Forward with Executive Compensation Proposal

The Federal Reserve Board today voted to re-propose the executive compensation rule mandated by the Dodd-Frank Act, prohibiting incentive-based compensation arrangements for executives that the regulators believe could encourage excessive risk-taking behavior. The National Credit Union Administration, FDIC, OCC and FHFA previously released their versions of the proposed rule, and the SEC is expected to do so in the coming weeks.

The proposed rule would apply to banks with more than $1 billion in assets, diving banks into three “tiers” based on asset size, with the largest banks subject to the most stringent requirements. Banks classified as “Level 1” (those with more than $250 billion in assets) and “Level 2” (those with $50 billion to $250 billion in assets) would be required to defer a percentage of qualifying incentive-based compensation for executives and significant risk takers for a specified amount of time. Regulators would have discretion over requirements for Level 3 institutions.

The proposed rule also requires institutions to keep a record of senior executives and risk-takers and disclose the incentive-based compensation arrangements of those individuals. Additionally, the rule includes a “clawback” provision that allows a covered institution to recover vested incentive-based compensation if the executive or risk-taker engaged in the behavior was found to have hurt the firm.