Wall Street Takes Aim At New Transparency Rule For Executive Pay

Wall Street has deployed an army of lobbyists to try to whittle away as much of the Dodd-Frank financial reform bill as possible, spending $242.2 million on 712 hired guns to press their message on Capitol Hill since the beginning of 2010, according to a new report by Public Citizen.

The 30 most politically active business and financial industry organizations also ponied up $15.6 million in federal political contributions during the same time period. The entities with the deepest pockets include: the U.S. Chamber of Commerce, the American Bankers Association, the Financial Services Roundtable, MetLife, Goldman Sachs, to name just a few.

Why lay out so much cash to influence Washington in the months leading up to the first anniversary of the Dodd-Frank financial reform law? Some of Wall Street’s biggest firms are gunning for a rule specifically designed to address one the main causes of the financial meltdown: exorbitant incentive-based executive compensation packages.The rule broadly bans “excessive” compensation, defined as compensation that is
“unreasonable or disproportionate to the services performed,” and also prohibits compensation that would “encourage inappropriate risks” by the financial institution.

In addition, for financial institutions with $50 billion or more in assets, at least 50 percent of incentive compensation must be deferred for three years and the company’s board must identify individuals who could expose the institution to major losses and ensure their pay packages do not create incentives for excessive risk-taking.

The proposal identifies multiple ways companies could structure compensations to balance risks and rewards in incentive pay, but does not require the use of any particular method other than the deferred incentive pay for executives at the very largest financial institutions

But one of the most basic aspects of the rule, which requires companies to disclose the pay ratio of their rank-and-file employees to their executives (excluding the CEO) to federal agencies, is what has Wall Street lobbyists in a dither.

The Securities and Exchange Commission has announced its intention to issue regulations implementing this pay-ratio disclosure requirement in the fall of 2011, spurring the mad lobbying rush.

Public Citizen analyzed the comments of 24 financial services companies, trades associations and allied groups on the proposed SEC rule forcing disclosure of executive pay.

In addition to the 24 companies that filed formal comments, six more met with regulators during the comment period to lobby on the rule. Their message was very focused, the report found. More than 70 percent of commenters asked to be partially or entirely exempted from the rule.

Some also asked for the exclusion of entire categories of jobs or for types of pay. For example, a large trade association for the banking industry asked for companies’ subsidiaries to be exempted and for the rule’s requirements on incentive-based pay to be limited to pay specifically labeled as an “annual bonus,” and not, for instance, multi-year bonuses.

“Wall Street is asking the regulators for exemptions that would defy the clear language and intent of Dodd-Frank,” said David Arkush, director of Public Citizen’s Congress Watch division. “The history of financial crises shows that if we carve out any significant portion of the financial sector from of key rules, we can expect the exempt firms to balloon and become the locus of the next financial crisis.”

The financial sector’s lobbyists also sought to weaken the rule by asking for broad discretion for companies and their boards to increase the time to implement it, and to downgrade the proposed rule to a guideline.

The criticism focused almost entirely on complaints that the rule would limit Wall Street’s ability to recruit or that the rule was burdensome, too prescriptive or amounted to a one-size-fits-all solution.

The AFL-CIO fired back with its own report extolling the merits of the new rule on executive pay, which has increased dramatically over the past three decades.

There are plenty of reasons for Congress and the SEC to keep the rule firmly in place, the union report found. Excessive levels of CEO pay come at the expense of shareholders who are the owners of publicly traded companies. High levels of pay also provide incentives for CEOs to take excessive risks and have been the focus of scorn for helping to drive Wall Street’s financial meltdown.

“By requiring that public companies disclose CEO-to-worker pay ratios, the Dodd-Frank Act encourages boards of directors to consider the relationship between CEO pay
and the compensation paid to other employees,” AFL-CIO analysts write in their report. “This provision provides greater transparency to investors about their companies’ compensation practices and for rank-and file employees.”