The idea behind the rule is to prevent financial firms from handing out big bonuses to executives who pursue short-term gains and take on large amounts of risk. If during that three-year window the executives' moves led to losses, their bonuses would be curtailed or eliminated.
The proposal, as stipulated by Dodd-Frank, would carve out banks with less than $1 billion in assets from the requirement and place stronger restrictions on large financial institutions with over $50 billion in assets.
The FDIC proposed that all firms establish plans to deter excessive compensation that rewards inappropriate risk-taking, but executives at the largest institutions would have to wait at least three years to receive at least half of their bonuses.
In addition, banks of that size would have to identify individual employees that have the ability to bring substantial risk onto the firm and must ensure their compensation is designed to balance risk and reward.
"This proposed rule will help address a key safety and soundness issue which contributed to the recent financial crisis – that poorly designed compensation structures can misalign incentives and induce excessive risk-taking within financial organizations," said FDIC Chairman Sheila Bair. "Importantly, we believe the rule will accomplish its objectives in a way that appropriately reflects the size and complexity of individual institutions."
The proposal now goes to other federal regulators, who must sign off on it before it is available for public comment.