The Dodd-Frank act is a sweeping example of financial regulation. Here's what it says about bonuses.
On July 21, 2010, President Barack Obama signed The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) into law, in response to the financial crisis of 2008. Part of the cause of the crisis came from large American companies awarding bonuses and other forms of immediate compensation, while ignoring the long-term risks of doing so. Below is a brief of Dodd-Frank’s stipulations that specifically address bonuses:
- Most far reaching Wall Street reform act in history.
- Investment banks went from privately owned to publicly traded in the 1980s which changed the culture – now Wall Street is a more “risk-loving” environment.
- Section 956(b) of Dodd-Frank requires financial regulation of any type of incentive pay arrangements at banks encourage inappropriate risk-taking (i.e., bonuses based on risk).
- Large banks must set aside half of bonus payments to be paid out over the course of three years.
- There is no rule against “hedging” - which means an executive can sell a deferred bonus to someone and receive funds for it immediately.
- The requirements only cover “executive officers” but this does not include traders or other high level employees who receive large bonuses and are key decision makers in investments.
- There are difficulties regulating banks because of the wide differences in pay practices within the financial sector.
- Typically, bank compensation includes a salary, stock and a bonus awarded at the end of the year.
- Additionally, regulators grapple with the fact they are attempting to curb risk in an industry that is based on risk taking.
- The legislation is loose and has a number of loopholes – there has been nothing passed prior to Dodd-Frank that tightens the reigns on banks and other corporations that dole out large bonuses.
Found this article interesting? Read about the different types of bonuses companies award here