October 22, 2009
Executive Compensation by Financial Intermediaries Gets A New Front
Posted by David Zaring

We told you about the impending TARP executive compensation rules yesterday.  The Fed is not so coincidentally proposing its own set of rules, and, as is increasingly common with that agency, there's a big-bank/small-bank distinction drawn in the mechanism of oversight.  With Basel II, that was a move thought to benefit big banks, but it looks - though the proof is in the pudding - like the compensation review proposed today is more onerous for large institution, though it is designed in a way that looks a bit like government-sponsored cartellization (which might be good for large institutions looking to cap the pay of their employees, etc).  Anyway, there are two proposals:

One, applicable to 28 large, complex banking organizations, will review each firm's policies and practices to determine their consistency with the principles for risk-appropriate incentive compensation set forth in the proposal. These firm-specific policies will be assessed by supervisors in a special "horizontal review," a coordinated examination of practices at the 28 firms. The policies and implementing practices adopted by these firms in response to the final supervisory principles will become a part of the supervisory expectations for each firm and will be monitored for compliance.

Second, supervisors will review compensation practices at regional, community, and other banking organizations not classified as large and complex as part of the regular, risk-focused examination process. These reviews will be tailored to take account of the size, complexity, and other characteristics of the banking organization.

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