By Cydney Posner

On Friday, Rep. Barney Frank, chairman of the House Financial Services Committee, released his bill entitled ‘‘Corporate and Financial Institution Compensation Fairness Act of 2009." 

 Besides the now obligatory say-on-pay provisions and requirements for independent compensation committee members and advisors (which appear to generally mimic the Treasury's bill), Frank's bill includes provisions designed to reduce " perverse incentives" in the compensation practices of financial institutions. (And just how many bills contain the word "perverse" in the description?) Under the bill, appropriate Federal regulators would be required to prescribe regulations to require each covered financial institution to disclose its structures for incentive-based compensation arrangements sufficient to determine whether the compensation structure

  • properly measures and rewards performance;
  • is structured to account for the time horizon of risks;
  • is aligned with sound risk management; and
  • meets such other criteria as the agencies may determine to be appropriate to reduce unreasonable incentives for officers and employees to take undue risks that could have serious adverse effects.

The bill then would require regulators to prescribe regulations that, taking the points above into account, prohibit any compensation structure or incentive-based payment arrangement that the regulators determine encourages inappropriate risks that:

  • could have serious adverse effects on economic conditions or financial stability; or
  • could threaten the safety and soundness of the covered financial institution.

Interestingly, the bill would apply not only to TARP recipients, but rather to financial institutions generally, and raises the question of whether there may be efforts to apply these measures more generally to other businesses in the future.

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