Sens. Warren, Vance Lead Push to Crack Down on Bank CEO Pay

Sen. Elizabeth Warren (D-Mass.) holds a news conference to announce legislation that would tax the net worth of America's wealthiest individuals at the U.S. Capitol in Washington, D.C., on March 1, 2021. Chip Somodevilla/Getty Images

A bipartisan group of senators, led by Sen. Elizabeth Warren (D-Mass.) and Sen. J.D. Vance (R-Ohio), introduced legislation to revive efforts to claw back big bank executives’ compensation in the event of a failure or resolution.

The senators, 11 of whom are members of the Senate Banking, Housing, and Urban Affairs Committee, introduced the Failed Bank Executives Clawback Act. The bill would allow federal regulators to claw back up to three years of compensation earned by bank CEOs, board members, controlling shareholders, and other integral individuals should the company fail or be resolved.

Under current regulations, the Federal Deposit Insurance Corp. (FDIC) possesses little ability to claw back executives’ pay if their banks crumble and impose enormous costs on the banking system and the broader economy.

Warren encouraged Congress to heed President Joe Biden’s request to strengthen the regulatory regime to hold failed bank executives accountable.

In March, Biden proposed allowing Congress to give the FDIC more authority to prohibit bank executives of failed companies from working in the industry and fine bank managers if these institutions shut down.

U.S. taxpayers should not face the costs of executives’ “excessive risk-taking and gross mismanagement,” said Vance.

“This legislation would right that wrong and ensure that failed bank executives are held accountable for the collapse of their institutions–not the American taxpayer,” he said in a statement.

Ohio Republican J.D. Vance (3rd L), who was then a senator-elect, arrives at a meeting with Senate Republicans at the U.S. Capitol in Washington on Nov. 16, 2022. Anna Moneymaker/Getty Images

According to Sen. Mike Braun (R-Ind.), bank executives may require an additional incentive to manage their risk better, especially if the federal government covers uninsured deposits exceeding the $250,000 limit.

“This bill to claw back bank executive compensation when the FDIC bails out a bank is necessary,” Braun noted.

At a House Financial Services Committee hearing in May, Federal Reserve Vice Chair for Supervision Michael S. Barr proposed more oversight for bank executive pay.

“Our oversight of incentive compensation for bank managers should also be improved,” Barr told lawmakers. “SVB’s senior management responded to the poor incentives approved by its board of directors. They were not compensated to manage the bank’s risk, and they did not do so effectively.”

During a May Senate Banking hearing, Sen. Sherrod Brown (D-Ohio) accused the executives of boosting stock prices and their own pay “but didn’t address the glaring risks from customer and industry concentration.

“When you put other people’s money and our broader economy at risk, there must be accountability for that level of mismanagement,” the committee chair said.

In 2022, former Silicon Valley Bank CEO Gregory Becker’s total compensation was valued at nearly $10 million. Michael Roffler, the First Republic CEO, earned a $900,000 base salary and a maximum annual incentive bonus package of $2.95 million in 2022. Former Signature CEO Joseph DePaolo made close to $9 million in 2021.

Overall CEO Pay Fell in 2022

In recent years, many criticisms have been lobbed against CEO compensation for being too excessive, especially during an inflationary climate.

An Economic Policy Institute (EPI) study learned that corporate CEOs earned an average of 399 times an average worker’s pay in 2021.

A May 2022 survey by Just Capital found that 73 percent of Americans think CEOs are compensated too much.

But a recent Wall Street Journal report discovered that CEO pay packages for two-thirds of the nation’s 500 largest companies declined in 2022 for the first time in a decade. However, the drop did not result from the board of directors or shareholders slashing the CEO’s pay. Instead, it was due to stocks slipping into a bear market.

It is estimated that 70 percent of CEO compensation originates from stock or stock option awards. Base salaries account for very little of CEO earnings. Economists argue that stock options offer an incentive to executives to boost the value for shareholders. So if the CEO can initiate a rally in the stock price, the stock package will be worth more. But this is also a double-edged sword, the Chicago Booth Review wrote.

“The problem is that a CEO may take excessive risks to drive up the share price. While that might increase the CEO’s compensation, he or she won’t necessarily share other shareholders’ pain if the stock loses value. Options exhibit ‘convexity,’ which means options granted to CEOs have a potentially unlimited upside, while the downside is limited to zero if the stock doesn’t rise to the predetermined price.”

For example, Tesla Motors CEO Elon Musk lost roughly $10 billion in value from his stock awards. Or, in another instance, Amazon CEO Andy Jassy’s compensation tumbled close to $148 million last year.