Fed gives Wall Street a deadline on pay plan
Tuesday, November 3, 2009
NEW YORK -- Summoned to the ornate Lower Manhattan headquarters of the New York Federal Reserve building on Monday, Wall Street's top bankers were given a Feb. 1 deadline to submit proposals for how they plan to improve their pay practices, people with knowledge of the meeting said.
The meeting, convened by New York Fed President William C. Dudley, was brief -- no more than 30 minutes -- and to the point with Fed regulators making it clear that they are serious about enforcing the executive compensation guidelines they proposed late last month.
While the rules have yet to be finalized, Dudley told Goldman Sachs chief executive Lloyd Blankfein, J.P. Morgan Chase chief executive Jamie Dimon, Morgan Stanley chief executive John Mack and others that he wants the banks to begin incorporating the new practices as they set year-end bonuses in the coming months.
The scene was repeated at other regional Fed banks across the country on Monday as the leaders of 28 of the largest financial firms met with regulators. The bank executives, at the Fed's request, were accompanied by directors of their boards' compensation committees.
Regulators stressed that the Fed is not looking to cap overall pay but instead wants the banks to structure bonuses in ways that do not encourage excessive risk taking, according to more than half a dozen people who either attended or were briefed on the meetings. Fed officials urged the banks to do more to align pay with long-term performance, such as by awarding a significant portion of compensation in stock, sources familiar with the meetings said. They spoke on condition of anonymity because the discussions were private.
Each of the banks will now be required to report on their compensation practices. Regulators will consider these submissions as part of a "horizontal review" of how banks handle incentives for executives, traders, and others whose decisions can expose a bank to risk, according to people with knowledge of the matter. The Fed could ask the firms to make changes in their plans.
Dudley told the executives that the Fed could change its guidelines based on feedback it receives, but he expects to retain the basic thrust of the proposals introduced two weeks ago and formalize them by the end of the year. He said bank supervisors would make their review of pay practices part of the Fed's ongoing oversight.
After the meeting in New York, executives at three of the banks represented said nothing they had heard from Fed officials raised alarms. Federal regulators, who have concluded that the financial crisis was caused in part by inappropriate pay practices on Wall Street, have already held numerous discussions with large banks over the past year about restricting executive compensation as part of a broader package of regulatory reforms.
On the same day last month that the Fed released its guidelines, the Obama administration's pay czar, Kenneth R. Feinberg, announced his ruling on executive pay for the top 25 most highly compensated executives at Citigroup, Bank of America and five other firms receiving exceptionally large amounts of government assistance. Feinberg also has said that he expects to set compensation for 75 additional employees at each of the seven companies under his purview by the end of the year.
The Fed, by contrast, is using its existing regulatory powers to address compensation at all U.S. banks.
On Monday, Fed governor Daniel K. Tarullo gave a speech in which he explained the central bank's approach to regulating bank compensation, making many of the same arguments publicly that Dudley did in private.
"We will have to build on the principles we have set forth and we may, over time, identify standards that should be universally applied to certain classes of employees," said Tarullo, who is leading the Fed's efforts to better supervise banks.