Note to Wall Street executives awaiting their full bonuses: Don't hold your breath.
Updated compensation rules expected from regulators in April will likely require banks to defer executive bonuses longer than the three years already in place at many companies. But how long that could be and how much of the bonus would be withheld remains unclear, the Wall Street Journal reported.
In Europe, the standard withholding period is 10 years, but a source told the Journal that the new period would likely be shorter than that. As for the amount, the original, 2011 draft of the regulations stated that as much as half of executive bonuses could be withheld.
After U.S. President Barack Obama met with top financial regulators in early March, he said that the rule determining bonuses, or incentive pay, for executives in finance was geared toward making executives “less incentivized to take big, reckless risks.”
The idea behind delaying bonuses is to give banks a chance to recoup some of those bonuses if an executive takes risks or actions that inflict damage on the company that isn't immediately apparent. It's one of the few remaining unresolved issues in the 2010 regulatory overhaul known as the Dodd-Frank Act.
Regulators are also looking to expand the definition of risk-taking to include more bank employees, and they are likely to specify how or when executives could lose all, not just some, of their bonuses, according to the Wall Street Journal. A bank employee who meets the definition of "risk-taker" could be newly defined, for example, by the size of the assets he or she trades.
Under the expected new rule, companies are likely to be required to take back some of executives' bonus pay if they have to reinstate financial results. The challenge for regulators is to figure out how a rule can be applied to broad and diverse swath of financial companies, from banks to investment advisers to credit unions. So far, the rule will apply to companies with at least $50 billion in assets.
The financial industry has said these new rules and restrictions have drained the industry of talent as people seek jobs in sectors where compensation is less subject to scrutiny. The industry will have the chance to comment on the proposed rule before it goes into effect.