News reports suggest that some federal financial regulators are planning to resurrect a 2016 proposed rule on executive compensation.[1] Limits on banker pay continue to play well politically in some quarters as a way of punishing banks or their executives for failings or misbehavior, or simply to lower compensation for bankers in general.
That enthusiasm, however, may eventually be governed by what Congress has by law actually empowered the federal banking agencies to do, and why.
The rumored compensation limits would apply to banks but generally not to hedge funds, private equity funds, private debt funds, payday lenders, fintechs or the host of other financial firms that now control more than half of U.S. financial assets; while broker-dealers and some investment advisors are covered, the SEC may not be joining the fun.[2] The lucky many excluded from the proposal also are not subject to the wide range of civil money penalties and debarments that the federal banking agencies are already empowered to impose and frequently do. Any comptroller, cyber executive or senior lawyer at a bank wishing to live a more bearable existence would have easy options. Of course, no other industry – be it aerospace or pharmaceuticals – sees the government setting executive pay.
Perhaps reflecting that concern, Congress never authorized the agencies to do what they proposed in 2016 and what they reportedly are planning to do now.
First, the relevant statute (Section 956 of the Dodd-Frank Act) only authorizes the agencies to prohibit a narrowly defined set of bad practices; it does not authorize the agencies to design a single, uniform system of compensation that all firms must use in paying their employees. It makes no reference to clawbacks, deferrals or any other politically popular means of restricting compensation.[3] Second, Section 956 does not actually cover executive compensation; rather, the statute addresses only one form of compensation: incentive compensation – that is, bonuses or other compensation tied to performance.
Let’s start with the statutory language of Section 956