06/24/2010
On Monday, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision (the Agencies) issued final Guidance on Sound Incentive Compensation Policies. The guidance is designed to help ensure that incentive compensation policies at banking organizations do not encourage imprudent risk-taking and are consistent with safety and soundness.
Although the proposed guidance only applied to banking organizations supervised by the Federal Reserve, the final guidance applies to all banking organizations supervised by the Agencies. However, the final guidance is expected to have less impact on smaller banking organizations, which, unlike their larger counterparts, may not need to implement systematic and formalized policies, procedures and processes. Whether or not an organization is considered "large" is determined under the relevant agency's standard. The guidance permits flexibility for customized arrangements.
The guidance applies to senior executives and other employees who, either individually or as part of a group, have the ability to expose the banking organization to material amounts of risk. The three key principals are: (1) incentive compensation arrangements should appropriately balance risk and financial results so employees are not encouraged to expose their organizations to imprudent risk; (2) these arrangements should be compatible with effective controls and risk-management and (3) should be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.
The final guidance will be effective on the date of its publication in the Federal Register. A complete copy of the final guidance can be found here.