Bank CEOs have seen their total compensation increase by an average of 9.5% over the past two years, but future raises could be smaller if proposed rule changes tied to loan-loss accounting and incentive compensation take effect.
Compensation Advisory Partners, an executive compensation firm that has advised Bank of New York Mellon, KeyCorp and other banks on executive pay plans, said in a report published in June that pending rule changes could force banks to adjust compensation plans starting next year.
How they will be adjusted will depend largely on how the final rules are written, said Eric Hosken, a partner at CAP.
The impact of those regulations on pay “could be really big but it’s just hard to know right now,” Hosken said.
The new accounting standard, known as Current Expected Credit Loss, or CECL, could be a major determinant of CEO pay, as banks will be required to estimate losses over the entire life of a loan. The measure is set to take effect Jan. 1 for publicly traded banks, though some
Banking companies will likely need to boost the size of their loan-loss reserves as a result of CECL. JPMorgan Chase earlier this year estimated it may need to boost
Hosken said he does not expect bank boards to retroactively dock a CEO's pay if the bank doesn’t meet performance targets that were set before CECL took effect.
But future pay formulas will need to be changed to account for what’s likely to be permanently higher reserve levels, he said. An increase in reserves will likely suppress profit growth, which is frequently used to as a benchmark for determining executive compensation.
The plans for approving new rules for incentive-based compensation, as required by the Dodd-Frank Act, is another story.
Regulators have been working for eight years on a rule to
Some
Any new rule on incentive pay could require bank boards to review their current policies and possibly make adjustments, Hosken said. The impact on pay will depend on whether new rules for incentive pay are the tough-minded reforms favored by Democrats, or more executive-friendly rules that are crafted under the guidance of regulatory agencies run by Trump appointees, Hosken said.
Most CEOs of large and regional banks have seen significant pay hikes lately, though the pace of their raises slowed in 2018.
In the 2018 results, bank CEO raises shrank in large part due to factors of their control, Hosken said. Bank stock values increased as investors realized the industry would see a boost from corporate tax cuts. After the positive effects of the tax cut dissipated, investors became less enamored with bank stocks. Many banks’ compensation plans are based on specific formulas tied to stock-price appreciation.
“The last couple of years, in anticipation of tax reform, you had a big jump in value of bank stocks,” Hosken said. “The rising rate environment was also favorable to banks. But tax reform is done and there’s less excitement now about interest rates.”
CAP did not provide a detailed breakout of its own calculations of individual executives’ pay, which the firm said is based on a proprietary model.
