Congress sent a message to financial regulators in 2010: no more pay that encourages Wall Street to take extra-large risks.
Since 2011, the average bonus at New York securities firms has climbed 31 percent.
The debate over reining in financial-industry compensation has now dragged on two years longer than it took Michelangelo to paint the Sistine Chapel. Big-bank lobbyists have even stopped talking about it. The work on implementing the rule, part of the Dodd-Frank Act, is shouldered by six government agencies with sometimes competing agendas. It stalled over a key concept: how to identify which employees expose a firm to enough danger that their pay ought to be capped.
"They've been dragging their feet for six years while we're continuing to see pay levels go up," said Sarah Anderson at the Institute for Policy Studies, a Washington-based advocacy group. "I think they want people to have the impression that, 'Oh, Dodd-Frank passed and that's done now.'"
Even as the industry braces for possible lower bonuses due to business conditions, Wall Street pay has become an issue in the U.S. presidential campaign, with candidates addressing the issue in the context of income inequality and the danger recklessness poses to the economy.
Supersized returns
Skewed incentives helped push the global financial system to the brink eight years ago. Lenders wrote too many unreasonable mortgages, traders sold too many offbeat financial instruments like collateralized debt obligations and credit-default swaps, and compensation ballooned. Citigroup Inc., which received emergency loans of $45 billion from taxpayers and much more from the Federal Reserve, paid a single energy trader a bonus of nearly $100 million. American International Group Inc. awarded $165 million in bonuses in 2009 after a $182 billion taxpayer bailout.
Americans' anger over such behavior led to the 2010 passage of the Dodd-Frank law, which aims to decrease the odds of a sequel by limiting any bonus incentive that "encourages inappropriate risks." Details were left up to government agencies.
The three bank regulators – the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — have only recently settled on how to label the key risk-takers whose compensation they need to constrain, and officials say they hope their proposal could be ready as soon as next month, according to a person with knowledge of the discussions. Still, that's only the banking regulators. Others need to be convinced.
Additional sections of Dodd-Frank concerning executive pay have also taken the slow lane. In August, the Securities and Exchange Commission finished a long-awaited rule requiring public companies to compare the wages of a typical employee with chief executive officer pay. Also last year, the agency put together a provision that allows an executive's pay to be clawed back if a company misreports earnings.
Play nice
From the early days of Dodd-Frank it was clear that one of the hurdles would be getting the SEC to play nice with the banking agencies. The three bank regulators tried to come up with a unified plan they could present to the SEC, said a person with knowledge of the discussions. The Federal Housing Finance Agency and the National Credit Union Administration are the other government bodies involved.
Spokesmen for the Fed, the FDIC, the OCC and the SEC declined to comment.
To be sure, it's a tough job. The challenge is to work out a universal way to outlaw hazardous behavior among a diverse range of firms — from asset managers such as BlackRock Inc. to investment banks like Goldman Sachs Group Inc. to deposit-taking institutions like Wells Fargo & Co. — in a business that thrives on, and relies on, taking risks.
The agencies made a first stab at proposing a rule in 2011, but critics assailed it as granting the industry too much wiggle room and it was scrapped.
