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Regulators May Force Wall Street To Defer Half Of Executives' Bonuses, Wall Street Journal Reports

First Posted: 02/05/11 12:52 PM ET Updated: 05/25/11 07:30 PM ET

Morgan Stanley

(Reuters) - U.S. regulators will propose that major financial firms defer at least half of bonuses paid to top executives for at least three years, the Wall Street Journal cited sources as saying on Saturday.

The Federal Deposit Insurance Corp is expected on Monday to approve the draft rule, which seeks to force the largest financial firms -- including Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) -- to tie incentive-based pay to individual employees' long-term performance, rather than just hand out large chunks of cash each year, the paper said.

Under the proposal, the firms would have to review the results of trades or other business decisions tied to an employee's bonus pay over the deferral period, the Journal cited people familiar with the discussions as saying.

If losses occur, the firms would have to reduce or eliminate the delayed compensation accordingly, it added.

The proposed rule also would instruct the boards of firms with more than $50 billion in assets to identify lower-rung employees who are capable of inflicting "material risk" on their company, the Journal said. The firms would have to defer a portion of bonus pay for these employees as well, it said.

The Dodd-Frank law, enacted in July, requires regulators to ban pay practices that encourage "inappropriate" risk taking. On Monday, banking agencies will release a rule to implement this section of the law.

The rule is expected to require a significant amount of executives' bonuses to be deferred over a number of years, similar to a proposal G20 leaders agreed to in 2009 in which the proposed period of deferral was at least three years.

That proposal also suggested 40 to 60 percent of bonus pay be deferred.

In June, a month before Dodd-Frank became law, banking regulators led by the Federal Reserve put out guidance on pay, suggesting compensation should not cause employees to take "imprudent risk" and that the board of directors should be involved in policing pay.

The rules to be released on Monday are expected to be more specific.

Some banks are already broadly in line with most of those terms, notably Morgan Stanley.

Copyright 2010 Thomson Reuters. Click for Restrictions.

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Filed by Hunter Stuart  |