You can hear the groans throughout Wall Street. With most firms cutting back, bonus time isn't cheery this season.
The good news: The government hasn't yet set rules regulating bonuses. The bad news: Many firms are changing their bonus policies anyway in anticipation of new regulations coming out later this year.
Under the Dodd-Frank Act of July 2010, six federal agencies are mandated to jointly issue rules on incentive-based compensation, or bonuses, at certain financial institutions. While Dodd-Frank required the agencies to have adopted the rules within nine months of the bill's passage, the deadline has been continually pushed back as the various agencies figure out how to enact the rules.
"Because the rule has to get agreement from so many different agencies, it's going to take longer and be harder to coordinate," said J. Robert Brown, Jr., a law professor specializing in corporate governance and securities regulation at the University of Denver's Sturm College of Law.
A roster of those involved says it all. Coordination has to happen between: The Securities and Exchange Commission, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, Federal Housing Finance Agency, and the Federal Reserve (the Office of Thrift Supervision was originally included but it has been absorbed into the OCC under Dodd-Frank).
“The rules are going to take longer and be harder to coordinate
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"The agencies are making progress in coming up with a final draft, perhaps in several weeks or a few months," said a source at one of the agencies. "However, each agency will need to approve it independently. I think the anticipation would be that the compensation plans that come under scrutiny according to any final regulation would [happen] next fiscal or calendar year."
Getting the Rule Right
Spokespeople for the SEC and FDIC said they're working with other agencies to move the process forward. The SEC is reviewing public comments with "an emphasis on getting the rule right," a spokesperson said. Other agencies declined to comment.
Despite outward statements of collaboration, the agencies aren't adhering to the same deadlines to get the necessary work completed. The SEC recently pushed back the deadline for adoption of the rules to sometime between July and December this year, while the Federal Reserve wants to adopt rules by March.
The agencies have agreed on a few basics, like which financial institutions would be affected by the rules. Compensation rules would apply to "covered financial institutions," or institutions with assets of $1 billion or more. They would be required to disclose incentive-compensation arrangements for employees, executive officers, principal shareholders and directors.
The regulations would also prohibit "excessive" incentive-based compensation or compensation that could "expose the institution to inappropriate risks that could lead to material financial loss." The agencies would establish standards that would determine if the compensation would lead to taking on more risk. What defines "excessive," however, hasn't been agreed upon.
Larger financial institutions, defined as banks with more than $50 billion in assets, credit unions with assets of $10 billion and more and federal home loan banks with assets over $1 billion would have additional restrictions.
Bonus Deferrals
At the larger organizations, at least half of the incentive-based compensation of an "executive officer," (which includes the president, chief executive officer, executive chairman, chief operating officer, chief financial officer, chief investment officer, chief legal officer, chief lending officer, chief risk officer, or head of a major business line), would have to be deferred over a period of at least three years.
Even though the rules haven't come down yet, banks are implementing deferral programs that will see a portion of cash and stock deferred over various amounts of time, depending on the rank of the employee and how much they're set to collect.
Morgan Stanley, for example, will defer any cash bonus more than $125,000 until December 2012 and 2013. At Credit Suisse, employees who earn total compensation of 250,000 Swiss francs or more will see part of their 2011 bonus deferred over three years. Traders and investment bankers who receive between $100,000 and $249,999 in bonuses at Bank of America will get 20% of it in cash, 20% in stock and 60% in unrestricted shares. Previously, those employees would have received 70% in cash and 30% in restricted shares.
"These institutions are getting ready for when the government introduces the new rules and they're taking them very seriously," said Michael Karp, managing partner at the Options Group, a global executive search and consulting firm.
Brown, the law professor, agreed. "Banks are aware that bonuses need to encourage long-term investment strategies and you'll see that reflected in the bonus structure. You'll see it even if it's not coded by rule."
Deferring the bonuses can also help banks save on immediate expenses as part of their cost-savings program.
In the U.K., where vitriol toward high compensation has made it a larger public policy issue than in the U.S., at least 40% of a bonus must be deferred for at least three years for all senior management or those in risk functions. That's usually the top 150 to 200 people, who are called "code" staff under the U.K. rules. When the bonus is more than 500,000 pounds, 60% must be deferred.
For all the U.K. code staff, at least 50% of the upfront and deferred bonus must take the form of shares or other instruments, with the upfront portion of the shares subject to a retention period of six months.
Brown believes the U.S. will eventually adopt something that resembles the U.K.'s bonus rules. "I think we're about five or six years behind the U.K.," he said. "It's a bellwether for what will happen here but with a lag. When you see the U.K. do it, you have to wonder when it will ripple back."
Write to Julie Steinberg at Julie.Steinberg@dowjones.com