Federal Housing Finance Agency

A toothless approach to reining in excessive exec pay

May 31, 2011: 11:18 AM ET

A recently proposed rule that addresses executive compensation at banks is a weak response to a problem that is larger than regulators seem to comprehend.

By Eleanor Bloxham, contributor

FORTUNE -- While the banks that managed to survive the financial crisis have largely mended their own balance sheets, they are far from out of the doghouse with regulators. Reports circulated last week that New York attorney general Eric Schneiderman's office is expanding its probe of bank mortgage operations, which already includes the likes of JPMorgan (JPM), Deutsche Bank (DB), and UBS (UBS). To understand the motivations at the banks that has paved the path to this probe, we need look no further than how the banks pay their executives.

Whatever changes financial institutions may have made to their risk oversight and compensation programs have been inadequate. That's clear just from the error-riddled foreclosure processes, which dragged on unimpeded (without even apologies until recently), causing multiple crisis aftershocks.

"State attorneys general told five of the nation's largest banks on Tuesday they face a potential liability of at least $17 billion in civil lawsuits if a settlement isn't reached to address improper foreclosure practices" a "figure [that] doesn't cover additional billions of dollars in potential claims from federal agencies," the Wall Street Journal reported on Wednesday.

While there's been lots of talk from banks and regulators, there's been far less action to establish sure footing in the risk and compensation arenas at these institutions.

The slow pace of change began right after the financial crisis engulfed the banks. President Obama appointed a pay czar (Ken Feinberg), and while caps on pay were instituted, none of the banks delivered any meaningful systemic change. The banks that received TARP funds were obligated to discuss their compensation programs in SEC filings, explaining how their practices did not encourage excessive risk. But rather than actually change compensation, bank compensation committees generally relied on workers inside the bank (i.e. risk management personnel) to bless their existing plans. More

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