Bank Regulation: Agencies Should Finalize Rulemaking on Incentive Compensation
Fast Facts
Three banks failed in early 2023. Top executives at these banks received stock bonuses totaling about $130 million from Jan. 2021-March 2023. One bank paid bonuses to executives on the day it failed.
Congress and others have raised questions about banks' incentive-based compensation practices. These practices can motivate good performance but also encourage risky behavior.
Federal regulators monitor compensation and risks at large banks. In reviews of 15 banks, they noted compensation concerns at 8.
Congress required 6 agencies to jointly prescribe regulations on incentive compensation in 2011. They haven't done so. We recommended they do so.
Highlights
What GAO Found
The structure and amount of executive compensation packages at three failed banks were similar to those of peer banks GAO reviewed. A median of 86 percent of executive compensation at the failed banks and 83 percent at the peer banks was incentive-based and tied to executive and bank performance. All the packages incorporated risk-mitigating elements that align with practices described in federal compensation guidelines. All the banks used financial measures of performance, such as return on equity and shareholder returns. Most banks also used nonfinancial measures, such as meeting goals for prudent risk management.
All the former top executive officers at the three failed banks received stock awards (totaling about $130 million) and made disposals (totaling about $214 million) from January 2021 through March 2023. Executives at two of the failed banks disposed of more than $17 million in the first quarter of 2023, which was similar to their disposals in the first quarter of the previous year.
Federal banking regulators use supervisory activities, such as ongoing monitoring and examinations, to review compensation issues and risks at large banks. From 2017 through 2022, regulators examined executive compensation at 15 of the 21 large banks GAO reviewed, including two of the three failed banks. Overall, regulators identified 10 supervisory concerns (matters requiring attention) related to compensation issues across eight institutions during this period. This included one supervisory concern in 2022 at the holding company of one of the failed banks, which was taking corrective action when the bank failed.
In 2010, Congress required six agencies to jointly prescribe regulations or guidelines on incentive compensation by April 21, 2011. The agencies formed a working group to draft and propose joint regulations but have yet to finalize them (see figure).
Timeline of Key Events Related to Rulemaking on Incentive-Based Compensation Arrangements
Leaders within and across the agencies hold differing views on regulatory approaches for incentive-based compensation arrangements. For example, some agency leaders advocate a principles-based approach that outlines general principles and objectives for discouraging inappropriate risk-taking. Others support an approach with more specific and stringent requirements. Reconciling these differences and jointly prescribing regulations or guidelines would help prevent excessive compensation arrangements at financial institutions that encourage inappropriate risks.
Why GAO Did This Study
Incentive-based compensation can motivate good performance but also encourage risky behavior. Bank failures in early 2023 and executive bonuses one bank paid on the day it failed raised questions about compensation practices at large banks.
GAO was asked to review compensation at three failed banks. This report examines (1) executive compensation packages at the failed banks and a peer bank group, (2) executives' stock transactions at the failed banks, (3) regulators' review of executive compensation at selected large banks, and (4) efforts to finalize an incentive compensation rule.
GAO analyzed the most recent publicly available annual disclosures for 11 banks (three failed banks and eight peer banks selected for similarity in asset size and business lines); public disclosures on stock transactions by executives at the failed banks (January 2021–March 2023); and examination documentation (2017–2022) on compensation for 21 banks (10 banks with largest asset size, eight peer banks, and three failed banks). GAO also reviewed agencies' proposed rules and public statements on the incentive compensation rulemaking since 2011.
Recommendations
GAO is making six recommendations—one to each agency required to issue incentive compensation regulations—to jointly prescribe regulations or guidelines as soon as practicable. Each agency agreed with the recommendation.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Federal Reserve System | The Board of Governors of the Federal Reserve System should jointly prescribe regulations or guidelines with the five other agencies that are directed to implement Section 956 of the Dodd-Frank Act, as soon as practicable. (Recommendation 1) |
In March 2026, officials from the Federal Reserve System said they had no updates to report related to this recommendation. This recommendation remains open because the agencies have not jointly developed regulations or guidelines. By finalizing regulations or guidelines, the agencies would ensure compliance with Section 956 and better prevent compensation practices that can undermine the safety and soundness of large financial institutions.
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| Federal Deposit Insurance Corporation | The Board of Directors of the Federal Deposit Insurance Corporation should jointly prescribe regulations or guidelines with the five other agencies that are directed to implement Section 956 of the Dodd-Frank Act, as soon as practicable. (Recommendation 2) |
In February 2026, officials from the Federal Deposit Insurance Corporation (FDIC) said they had no updates to report on this recommendation. This recommendation remains open because the agencies have not jointly developed regulations or guidelines. By finalizing regulations or guidelines, the agencies would ensure compliance with Section 956 and better prevent compensation practices that can undermine the safety and soundness of large financial institutions.
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| Federal Housing Finance Agency | The Director of the Federal Housing Finance Agency should jointly prescribe regulations or guidelines with the five other agencies that are directed to implement Section 956 of the Dodd-Frank Act, as soon as practicable. (Recommendation 3) |
In February 2026, officials from FHFA said the agency remains committed to working with the other agencies and stands ready to resume work when all of the agencies are amenable. This recommendation remains open because the agencies have not jointly developed regulations or guidelines. By finalizing regulations or guidelines, the agencies would ensure compliance with Section 956 and better prevent compensation practices that can undermine the safety and soundness of large financial institutions.
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| National Credit Union Administration | The Board of Directors of the National Credit Union Administration should jointly prescribe regulations or guidelines with the five other agencies that are directed to implement Section 956 of the Dodd-Frank Act, as soon as practicable. (Recommendation 4) |
In February 2026, officials from NCUA said they had no action to report related to this recommendation. This recommendation remains open because the agencies have not jointly developed regulations or guidelines. By finalizing regulations or guidelines, the agencies would ensure compliance with Section 956 and better prevent compensation practices that can undermine the safety and soundness of large financial institutions.
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| Office of the Comptroller of the Currency | The Comptroller of the Currency should jointly prescribe regulations or guidelines with the five other agencies that are directed to implement Section 956 of the Dodd-Frank Act, as soon as practicable. (Recommendation 5) |
In February 2026, officials from the Office of the Comptroller of the Currency (OCC) said they have not issued a new proposal for a joint regulation or guidelines, but are committed to implementing section 956, and OCC staff continue to consult with staff from the other agencies. This recommendation remains open because a joint regulations or guidelines has not been issued. By finalizing regulations or guidelines, the agencies would ensure compliance with Section 956 and better prevent compensation practices that can undermine the safety and soundness of large financial institutions.
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| United States Securities and Exchange Commission | The Securities and Exchange Commission should jointly prescribe regulations or guidelines with the five other agencies that are directed to implement Section 956 of the Dodd-Frank Act, as soon as practicable. (Recommendation 6) |
In December 2025, SEC notified GAO of the administrative closure of the recommendation. The agency noted that it cannot independently implement Section 956 of the Dodd-Frank Act, and that this legal and operational constraint renders any unilateral action infeasible for the foreseeable future. SEC noted that it believes that corrective actions taken to date are sufficient and that no further action is required as of December 2025. Corrective actions SEC noted included the actions addressed in its April 2025 update; the inclusion of the planned joint regulation in SEC's Spring 2025 Unified Agenda of Regulatory and Deregulatory Actions; and SEC staff continuing to engage with counterparts at the other agencies, maintaining momentum toward joint rulemaking when practicable. GAO will continue to monitor actions on the joint rulemaking and update our status when the joint rulemaking has been completed.
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