Congressional Legislation Seeks to Restrict Executive Compensation at Certain Financial Institutions

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The Wall Street Compensation Reform Act of 2010 (S. 3149), introduced by Sen. Bill Nelson (D-FL), is meant to motivate “systemically significant” financial institutions to change their executive compensation policies. The incentive is their eligibility for tax deductions. The bill also attempts to protect the federal government, and ultimately taxpayers, from risky financial dealings by the largest financial corporations.

“Systemically significant” financial institutions are defined in the bill as those primarily in the business of finance, with more than $25 billion in assets. The bill would also apply to financial institutions with more than $10 billion in assets and more than a 20-to-1 debt-to-equity ratio.

The bill would affect the compensation of high-level executives and other employees, who earn more than $1 million if their work contributes to the financial institution’s exposure to risk. They could be exempt, however, if they provide information showing that their work is not significantly related to that risk.

The bill also includes provisions to change the tax-deductibility of executive compensation, relating to performance-based compensation, the use of personal hedging strategies, and what some would consider other loopholes in executive compensation policies of these financial institutions.

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