Tuesday, June 9, 2009

Treasury Department Set to Announce Compensation Guidelines for Banks

Peter Barnes, Senior Washington Correspondent

The Treasury Department is expected to announce as early as Wednesday new guidelines on compensation for bank executives, people in the financial industry said.
The guidelines were mandated by Congress as part of the economic stimulus package it approved earlier this year, after a public backlash over big pay packages doled out even at troubled firms that received government bailout money.

Under the legislation, the guidelines will cover pay and certain bonuses of top managers at banks that received funding from the Troubled Asset Relief Program, though two people familiar with the matter said the guidelines may cover more financial firms.

One financial industry person said Treasury could issue specific regulations for compensation or, at a minimum, release principles, leaving bank regulators to write their own rules. Most national banks are regulated by the Treasury itself, however, through its Office of the Comptroller of the Currency.

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Despite the legislation, which called for tough new pay rules on firms, the law gives the Treasury leeway in setting them. As a result, sources said they expect the rules will be flexible to allow firms to still offer large compensation packages that attract and retain key executives and employees.

But to meet Congress's goal of creating pay plans that don't encourage short-term risk taking -- which many lawmakers blame in part for the recent financial crisis and, they believe, allowed some fired executives to walk away with multimillion-dollar severance packages -- the guidelines will generally require companies to tie pay and bonuses to a firm's long-term performance and risk-taking strategies.

See our Executive Compensation page for the latest videos and stories on the topic.

For example, a firm may grant stock options that vest over many years, rather than just in a few years.

The guidelines will also include "clawback" provisions that would repeal stock and option grants for an executive if a company's performance later falters.

A Treasury official is expected to outline the department's guidelines at a Congressional hearing scheduled for Thursday.

The Treasury is also expected to appoint a compensation "czar" to oversee implementation of the new guidelines, but the czar is likely to be named at a later date.

The Federal Reserve, which regulates bank holding companies -- the larger parents of banks -- is separately developing its own set of compensation rules. But the Fed's guidelines are not expected to be released for several months.

A Treasury spokesperson did not immediately respond to requests for comment.


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