Wall Street Bonus Cuts Will Reduce Risk U.S. Regulators
U.S regulators are all set to address the growing concerns about top financial institutions paying huge bonuses without considering long term financial stability of the organization. A new proposal is being mooted, that will require that top ranking executives put off receiving half their bonus for a minimum period of 3 years.
This news comes from sources who are in the know about the proposal that is being unveiled at the FDIC board meeting. Among those institutions that will be affected by this new proposal are Bank of America Corp, Morgan Stanley and Goldman Sachs.
The proposal is based on the Dodd-Frank law that aims at reducing the risk that investors and stakeholders face if the company pays out a significant proportion of its short term profits to top level employees. The reform law came into being to ensure that no adverse long term implications arise out of such short sighted bonus policies. By deferring bonuses of some high ranking employees, the profits of the company can be deployed towards cementing its financial stability.
According to the proposal mooted by the U.S. regulators, the deferred bonus that the employee could draw at a later date, post the three year period, depends on his contribution to the company’s overall profitability. The eligible bonus may be paid in installments not exceeding one-third of the total amount in each year post deferral period.
Not all executives are being targeted under this new proposal, which clearly categorizes the employees who will fall under its purview. The salaries drawn will be a major factor in determining if an executive will be required to defer his bonus. Other than this, employees, such as traders, who present a risk to the company through their activities, will also be identified by the board of directors. For such employees, an alternative method of payment that eliminates the chance of endangering the company will have to be designed. For instance, pay based on incentive may be deferred.
The fears that big companies are focusing on keeping top notch employees happy at the cost of stakeholders’ future security have been growing for a while now. In fact, in a bid to address such concerns, many big institutions have already implemented profitability based pay increases for top level executives. Linking the performance of the company directly with the employee’s pay is an attempt to demonstrate that the fortunes of the top level employees indeed lie in the success of the business.
However, making this a rule will ensure that businesses that are currently not following any such practices will also be prompted to insulate their financial core from such risks, giving stakeholders some much needed peace of mind.