Fed proposes rule tying executive compensation to risk

The Federal Reserve proposed a rule Wednesday that would force financial institutions to evaluate the amount of risk executives take as part of their compensation packages. The rule (found here) is one of the many coming under the Dodd-Frank Act and it applies to institutions with $1 billion or more in assets. One of the largest crackdowns lawmakers wanted to take after the financial crisis was on executive pay for individuals who exposed their companies to alarming amounts of bad bets, specifically on mortgages. The Fed’s rule runs parallel with the Federal Deposit Insurance Corp.‘s proposal in February that requires large banks to defer 50% of their incentive-based bonuses to executives for three years. Another recent rule from the FDIC could give it the authority to recoup compensation from executives of failed banks. “In prohibiting incentive compensation arrangements that could encourage inappropriate risks, the proposal would require compensation practices at regulated financial institutions to be consistent with three key principles–that incentive compensation arrangements should appropriately balance risk and financial rewards, be compatible with effective controls and risk management, and be supported by strong corporate governance,” the Fed said Wednesday. The new rule would require these large institutions to submit an annual report to their federal regulator describing the structure of their incentive payments. For credit unions, the asset threshold would be higher at $10 billion or more, but the Federal Housing Finance Agency said Fannie Mae and Freddie Mac would not be exempt from the executive compensation rule. The final rule would be adopted six months after it is adopted. However, there is currently a 45-day comment period. Write to Jon Prior. Follow him on Twitter @JonAPrior.