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Rule Proposed to End Incentive-Based Pay

Posted by Lori Rezac on May 26, 2016 11:24:22 AM

lori_5-26-16.jpgCurrently in the public comment stage, a new rule would end incentive-based pay that encourages inappropriate risk-taking at covered financial institutions. According to a joint release posted on FHFA, these flawed, incentive-based compensation packages were a large contributor to the financial crisis that began in 2007. At that time many compensation structures centered on volume and loan size rather than quality.

 

Incentive-based compensation is important in attracting and retaining skilled and talented staff in the mortgage industry, making this proposal incredibly important. By tightening the strings too much, talented individuals will be deterred from entering the mortgage industry. By not tightening them enough, the industry may be headed down the wrong road once again.

 

In 2011, a proposed incentive-based compensation rule would have required compensation practices to be consistent with three principles – that incentive-based compensation arrangements should appropriately balance risk and financial rewards, be compatible with effective risk management and controls, and be supported by strong corporate governance. The 2011 proposal was less specific and less strict and the more recent proposal.

 

With this new proposal, financial institutions with assets of $1 billion or more would be required to follow the proposed rules, splitting those into 3 different levels based on asset size. Targeting senior executive officers and employees who take significant risk, these institutions would be required to report their incentive-based compensation arrangements, with a seven year retention period. Oversight would be required by the boards of directors of the covered institutions. 

The deadline for comments on the proposed rule is July 22, 2016.

 

New rule to end incentive-based pay

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