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Catfight over clawing back banker pay

Karen M. Kroll | Sept. 27, 2011
For a month now, the Federal Deposit Insurance Corp. has had the power to recoup compensation paid to execs with financial institutions -- if, that is, the institution is taken over by a government agency, and it's shown that the executive acted recklessly. But whether this new regulatory ability will discourage excessive risk-taking on the part of executives, or simply will limit their ability to do their jobs, is being hotly debated. "

But on the other side, the Financial Services Roundtable, which represents large financial services companies, wrote to the FDIC in May that Section 380.7 "is unwarranted both as a matter of statutory language and as a matter of sound policy." For one thing, the regulation could provide an incentive for the management team with an institution in distress to wind it down, rather than attempt to turn it around -- likely a riskier proposition.

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The potential risk to possible chief executive candidates might make it difficult to entice individuals who have the skills and experience needed to turn around a failing institution to come on boards, says Edward Hauder, senior advisor with Exequity, a compensation consulting firm. "It may not give the board enough tools to get someone to come in, take a huge risk and try to turn around a sinking ship."

Rebel Cole, professor of finance with DePaul University in Chicago, however, points out that executives can account for this risk when negotiating their compensation package. "It's a specious argument," he says of the claim that board could find themselves hobbled.

Still, having the FDIC start regulating executive pay does pose problems, Hanweck says.

The setting pay should be a management decision; directly regulating it could drive away candidates at all levels. Such pay regulation also could stifle innovation, which requires taking risks. "I'm in favor of regulatory oversight, but there are certain things where you run into serious problems," says Hanweck.

A more effective option for recouping funds is through shareholder lawsuits, he argues. Any funds recouped would go directly to shareholders, rather than some fund established by regulators.

In addition, the courts, rather than the regulators, have more experience overseeing large, complicated liquidations.

"The courts know how to liquidate assets," he says. "It's what they're established and set up to do."


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