The Wall Street pay practice that has been described as a way to make banks safer is now set to enrich top executives. When banks are allowed to increase shareholder dividends, the New York Times reports today, chief executives who are paid in stock will see massive rewards.
The nation's biggest banks have enjoyed a remarkable recovery, even as key elements of the broader economy, including many small banks, still falter from the downturn. When results of the most recent bank "stress tests" are released to banks Monday, the big banks will likely get high marks, which would mean they'd be allowed to pay higher dividends to shareholders.
Some chief executives, who receive large portions of their compensation as company stock, would get millions of dollars' worth of payment.JPMorgan chief Jamie Dimon could eventually get nearly $6 million a year in dividends, and Capital One chief Richard Fairbank could get nearly $3 million yearly, the New York Times reports.
Government officials scrutinized executive compensation in the wake of the financial crisis. Big bonuses for executives, which rewarded short-term gains and didn't encourage chiefs to consider the long-term health of their institutions, led banks into reckless deals, experts say. To remedy this situation, lawmakers and regulators have pressured banks to pay executives in company stock. Executives would think like owners, the logic went, and they'd have a personal stake in making sure their company survived beyond the next quarter.
Many institutions have re-structured executive compensation to include more stock. In some cases, executives' base salaries increased, to offset smaller bonuses. Stock payments, moreover, haven't actually caused banks to behave differently, concluded a report released late last year by the Council of Institutional Investors. The stock awards are so large, the report said, that executives don't treat them with the delicacy regulators expected.
Now, those amplified stock payments are expected to get even sweeter. After the financial crisis seemed to threaten the survival of Wall Street's most profitable institutions, regulators have required banks to cut their dividend payments, to bolster their defenses against losses. But as bailout money gets repaid, and as banks post profits, the government has allowed them to increase the money they pay shareholders.
The most recent "stress test," which uses simulations to determine the financial health of the nation's 19 largest banks, is concluding. A government seal of approval would open the door to big dividend payments. That would be a boon for shareholders, which often include investors like pension funds. It would be a larger boon for chief executives, who are often some of the biggest shareholders.
Pay at Wall Street firms rose 5.7 percent to set a new record last year, the Wall Street Journal reported.
Regulators haven't finished writing rules that would govern bank executive pay. At a House hearing in September, officials from the Federal Reserve, the Securities and Exchange Commission and the Federal Deposit Insurance Corp. declined to identify what constituted "inordinately large" pay.
"It's very nuanced," Federal Reserve general counsel Scott Alvarez said at the time. "There is no number."