Curbs on Bankers' Cash Pay Likely - Analyst Blog

In order to restrain excessive risk-taking, U.S. regulators are pondering over forcing some of the nation's mega banks to award executives half or more of their pay in stock or other deferred compensation, the Wall Street Journal reported on Monday.

The target banks include Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Goldman Sachs (GS) and Morgan Stanley (MS). Excessive risk taking by these banks had resulted in the financial crisis.

Regulators feel compelled to take this action following a provision in the Dodd-Frank Act that was signed into law on July 21, 2010. According to the Act, regulators have the authority to prohibit any bonus plan of financial institutions (with more than $1 billion in assets) that encourages out-of-place risks.

Prepaid cash bonuses are very risky in the short term, considering the market volatility. If a company incurs huge losses caused by executives and decides to penalize them, cash bonuses will not be immediately revocable for many executives.

We have already seen how the risk-taking attitude of many executives led to the recent financial crisis. As executives received most of their awards in the form of cash, they did not bother about the possible aftermath of their risk taking.

Following the financial crisis, most financial companies have voluntarily taken the initiative to reduce their amount of cash bonuses. Now, the compulsion to reduce cash bonus will probably be a resisting factor for another financial crisis.  

In fact, compensation in the form of stock or deferred payment will force executives to take care about their company's long-term prospects. Regulators may also set a minimum ratio of cash compensation and deferred payment of executives in the long run.

It is our belief that the restriction on pay structure, if enacted, would provide more liquidity to the companies as majority of the awards to executives would not be in the form of cash advances. However, less cash payment could make these companies less competitive in retaining talent.

 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
GOLDMAN SACHS (GS): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
MORGAN STANLEY (MS): Free Stock Analysis Report
 
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