Bank pay overhaul?

The Presidential Administration of Barack Obama is considering reforming the way financial institutions pay their employees. Primarily they are trying to align pay with long-term performance. It’s about damned time.

Power to enforce such measures would come from the Federal Reserve’s supervisory powers or the power of the Securities and Exchange Commission (SEC). And of course there is always the obvious, yet little discussed power of “it’s the right thing to do.” Unknown to me, but surprising, is the fact that the Office of the Comptroller of the Currency (OCC) has had the power to sanction financial institutions that have had excessive pay packages. However, this power is rarely, rarely invoked. Hence, my ignorance of such powers.

According to the Wall Street Journal one of the options being considered is the creation of a Federal Reserve rule that would curb pay if it threatens the “safety and soundness” of the bank. An example of that type of rule would be preventing loan officers from being compensated based on the volume of loans they underwrite, and instead focus on the quality. Can you believe that something so friggin‘ obvious has to actually be legislated? It boggles the mind.

There is some discussion that some in Congress may introduce a law that would grant the Federal Government more authority to monitor pay practices. I have been saying for as long as this blog has been around that such checks on egregiously irresponsible pay packages are necessary for the long-term health of the economy.

And of course the free-marketers are scared and worried and frightened about government micro-management. Blah, blah, blah. The WSJ quotes an anonymous Administration official who says of the efforts to reform compensation, “This is not going to be about capping compensation or micro-management. It will be about understanding what is the best way to align compensation with sound risk management and long-term value creation.” Amen!

This will be an important development to watch.

Jason