ANALYSIS-Small banks swept into Wall Street pay crackdown
* Dodd-Frank targets pay at banks with $1 bln in assets
* Regulators going further, scrutinizing small banks too
* Experts: Small banks have big collective market impact
* Community banks say struggling under regulatory burden
NEW YORK, July 24 (Reuters) - The Private Bank of Buckhead, a tiny lender and deposit-taker, isn't the kind of bank that people associate with lavish Wall Street bonuses or the subprime mortgage bonanza.
In fact, with just $162.4 million in assets and 26 employees, the Atlanta-based company appears small enough to escape most of the provisions of the 1-year-old Dodd-Frank financial reform bill.
Yet Buckhead is under scrutiny from U.S. regulators tightening up their policing of compensation for what may be millions of employees across the financial services sector.
"It has snowballed," said Steven Alexander, president of Buckhead's Private Mortgage Services mortgage brokerage. "It's just one more hurdle to jump for the small banks and independent mortgage brokers that are trying to compete against the big banks."
Section 956 of Dodd-Frank requires the government to monitor incentive compensation at thousands of banks, thrifts, credit unions and broker-dealers.
The rule is targeted at financial companies with more than $1 billion in assets -- big banks such as Goldman Sachs (GS.N), Bank of America (BAC.N) and Citigroup (C.N) that dole out multimillion-dollar bonuses to their highest performers. The Federal Reserve has said bank bonuses for risky bets that produced short-term profits helped cause the 2007-2009 crisis.
But the Federal Deposit Insurance Corp and other regulators are going further than the Dodd-Frank mandate and are also combing through pay practices at small banks, according to sources involved in the examinations.
That's where Buckhead comes in.
SUM OF THE PARTS
In regulatory filings, Buckhead reported a 2010 profit of $1.7 million -- about what JPMorgan Chase (JPM.N) earned in just 52 minutes.
The small Atlanta bank paid out $2.7 million in salaries and benefits last year, while JPMorgan CEO Jamie Dimon received that amount for himself in just 43 days.
Still, regulators say small banks like Buckhead collectively play a significant role in the U.S. mortgage-finance machine and thus need to be monitored as well.
The regulators' goal is to prohibit any incentive that encourages inappropriate risks. Regulators have a particular focus on the mortgage business with good reason, said Rose Marie Orens of Compensation Advisory Partners.
"At the height of subprime, producers and brokers aggregated loans, sold them to security houses, and they made a lot of money," she said. "Did they make $20 million? No. But did they make lucrative compensation for a mortgage originator? Yes."
While the problems are clear, solutions are much more difficult.
Since the height of the financial crisis, banks have been issuing more bonuses in stock and deferring the payouts over three-year periods. The change is meant to tie performance to longer-term risk and the overall well-being of the firm. Clawback provisions have also become more frequent.
However, critics contend prescriptive pay formulas across different lines of business and different types of financial companies are ineffective at best.
Joe Spivack, a risk-management expert at the bank consulting firm CEIS Review, said it's difficult to get top employees to sign onto deals that have lower pay or more strings attached. Even when bonuses are tied to performance, he said, a three-year time frame may not be long enough to reflect the duration of credit risk.
"The idea that if we can just design the system right it will run perfectly on autopilot -- good luck with that!" Spivack said.
Sources at regulators contacted for this article would not comment on the record about the Dodd-Frank reform, since it is still in the rulemaking process. Nor would they discuss specific financial companies.
But they insisted small companies would not shoulder the same regulatory burden as large institutions, which will face more scrutiny and submit more information more frequently.
In fact, the proposed Dodd-Frank rule on incentive-based compensation explicitly says that "the volume and detail of information provided by a large, complex institution that uses incentive-based arrangements to a significant degree would be substantially greater than that submitted by a smaller institution that has only a few incentive-based compensation arrangements or arrangements that affect a limited number of covered persons."
Christopher Cole, senior regulatory counsel for the Independent Community Bankers of America, a trade group, said he hasn't heard of regulators going overboard, though they have been looking closely at "golden parachutes" and compensation plans that are "too generous and too extravagant." He worries that regulators will start micromanaging compensation at small banks whose pay structures work just fine.
"It doesn't surprise me that they're looking at it more closely because they have made a big to-do about it," said Cole. "But community bank compensation does not really need to be looked at. Even community bank CEO compensation comes in at really reasonable levels, often below $200,000 a year.
That may be one reason Buckhead was targeted.
The average Buckhead employee earned $108,880 in 2010, just 7 percent less than the average JPMorgan employee.
Buckhead's Alexander said the company's mortgage brokerage has done away with commissions entirely to avoid the headaches and costs of complying with regulators' demands.
As a result, some employees are simply getting paid less, while others have gotten salary bumps to make up for the lack of commissions. Over the long term, Alexander said he worried that the changes would raise the fixed costs of operations without improving performance.
"It fosters mediocrity," Alexander said. "Employees are not incented to go the extra mile or to overachieve. Why stay til 7 to close a deal when you get paid the same if you leave at 5?"
He also believes big banks are getting an advantage because it's easier for them to absorb the costs of compliance.
"This rule, like many others, was supposed to help consumers," Alexander said, "but it ends up raising the cost of mortgages and limiting their options."
(Reporting by Lauren Tara LaCapra; Editing by Lisa Von Ahn, Phil Berlowitz)
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