As bankers' incentive compensation has faded as a topic of public ire and media headlines, it has also become less of a focus for regulatory scrutiny. This is good for banks, as it gives them greater discretion in their pay for employees, but regulators' hands-off approach could change if the broader environment does, speakers at a bank compensation conference said.
Banker pay was thrown into the spotlight during the financial crisis. Regulators imposed constraints on incentive compensation for banks that accepted government bailout funds. They also issued a controversial proposal with more than 280 pages outlining the definitions and parameters of incentive compensation.
Regulatory interest in compensation has largely subsided in the years since the crisis, panelists said during the Bank Director Bank Compensation and Talent Conference.
"We're pretty much where we were prior to the Dodd-Frank Act," said Douglas Faucette, chair of Locke Lord's bank regulatory and transactional practice group. "We're in a good place, but who knows what the future will hold."
Regulators give healthy banks latitude to create their own incentive plans. If regulators encounter an unusual or outsized compensation plan at a healthy bank, they might ask management or the board about the processes that went into designing it. But Faucette said this is fairly uncommon.
Gregory Hudson, director of examinations at the Federal Reserve Bank of Dallas, said the Fed is careful about becoming "too proscriptive" when reviewing incentive compensation at healthy banks. He pointed out that regulators issued interagency guidance in 2010 stating that banks must ensure their compensation plans appropriately tie rewards to long-term performance and do not undermine the institution's safety and soundness.
The supervisory approach shifts dramatically at banks rated a three or lower on the CAMELS regulatory rating system, which ranges from one to five and encompasses areas such as capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to changes in the environment; a higher rating indicates a healthier bank.
Faucette said rules restricting change-in-control payouts, or so-called "golden parachutes," can complicate resolution efforts such as selling a troubled bank. Banks can apply to regulators to waive the rule and approve the payout, but Faucette said this is rare.
Both Faucette and Hudson pointed to instances where the Federal Deposit Insurance Corp. declined to join another regulator’s waiver approval. Hudson said that in his case, the FDIC's representative was concerned about approving a pay package at a bank that could subsequently fail. Both speakers acknowledged that it can be difficult to attract talented executives who can turn around a troubled institution without an attractive pay package.
Although banker pay had largely fallen out of the spotlight postcrisis, a fake account scandal at Wells Fargo & Co. brought it screaming back to the attention of the public and regulators. The bank has faced intense regulatory scrutiny since September 2016, when authorities fined it for allowing retail staffers to open millions of phony accounts.
Wells Fargo has since revised its compensation structure for branch employees, and the Office of the Comptroller of the Currency conducted a horizontal review looking at incentive compensation structures at other banks.
Hudson said the scandal showed the importance of having controls around compensation structures for all employees, to examine whether incentives are appropriate. Banks should conduct risk assessments around all their rewards to ensure the objectives align with the institution's culture and priorities, he added.
Wells Fargo demonstrated that "people will do what you incentivize them to do," Hudson said.