[Federal Register Volume 75, Number 122 (Friday, June 25, 2010)]
[Notices]
[Pages 36395-36414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15435]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC-2010-0013]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1374]
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket ID OTS-2010-0020]
Guidance on Sound Incentive Compensation Policies
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System, (Board or Federal
Reserve);
[[Page 36396]]
Federal Deposit Insurance Corporation (FDIC); Office of Thrift
Supervision, Treasury (OTS).
ACTION: Final guidance.
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SUMMARY: The OCC, Board, FDIC and OTS (collectively, the Agencies) are
adopting final guidance designed to help ensure that incentive
compensation policies at banking organizations do not encourage
imprudent risk-taking and are consistent with the safety and soundness
of the organization.
DATES: Effective Date: The guidance is effective on June 25, 2010.
FOR FURTHER INFORMATION CONTACT:
OCC: Karen M. Kwilosz, Director, Operational Risk Policy, (202)
874-9457, or Reggy Robinson, Policy Analyst, Operational Risk Policy,
(202) 874-4438.
Board: William F. Treacy, Adviser, (202) 452-3859, Division of
Banking Supervision and Regulation; Mark S. Carey, Adviser, (202) 452-
2784, Division of International Finance; Kieran J. Fallon, Associate
General Counsel, (202) 452-5270 or Michael W. Waldron, Counsel, (202)
452-2798, Legal Division. For users of Telecommunications Device for
the Deaf (``TDD'') only, contact (202) 263-4869.
FDIC: Mindy West, Chief, Policy and Program Development, Division
of Supervision and Consumer Protection, (202) 898-7221, or Robert W.
Walsh, Review Examiner, Policy and Program Development, Division of
Supervision and Consumer Protection, (202) 898-6649.
OTS: Rich Gaffin, Financial Analyst, Risk Modeling and Analysis,
(202) 906-6181, or Richard Bennett, Senior Compliance Counsel,
Regulations and Legislation Division, (202) 906-7409; Donna Deale,
Director, Holding Company and International Policy, (202) 906-7488,
Grovetta Gardineer, Managing Director, Corporate and International
Activities, (202) 906-6068; Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
Compensation arrangements are critical tools in the successful
management of financial institutions. These arrangements serve several
important and worthy objectives, including attracting skilled staff,
promoting better organization-wide and employee performance, promoting
employee retention, providing retirement security to employees, and
allowing an organization's personnel costs to vary along with revenues.
It is clear, however, that compensation arrangements can provide
executives and employees with incentives to take imprudent risks that
are not consistent with the long-term health of the organization. For
example, offering large payments to managers or employees to produce
sizable increases in short-term revenue or profit--without regard for
the potentially substantial short or long-term risks associated with
that revenue or profit--can encourage managers or employees to take
risks that are beyond the capability of the financial institution to
manage and control.
Flawed incentive compensation practices in the financial industry
were one of many factors contributing to the financial crisis that
began in 2007. Banking organizations too often rewarded employees for
increasing the organization's revenue or short-term profit without
adequate recognition of the risks the employees' activities posed to
the organization.
Having witnessed the damaging consequences that can result from
misaligned incentives, many financial institutions are now re-examining
their compensation structures with the goal of better aligning the
interests of managers and other employees with the long-term health of
the institution. Aligning the interests of shareholders and employees,
however, is not always sufficient to protect the safety and soundness
of a banking organization. Because banking organizations benefit
directly or indirectly from the protections offered by the Federal
safety net (including the ability of insured depository institutions to
raise insured deposits and access the Federal Reserve's discount window
and payment services), shareholders of a banking organization in some
cases may be willing to tolerate a degree of risk that is inconsistent
with the organization's safety and soundness. Thus, a review of
incentive compensation arrangements and related corporate governance
practices to ensure that they are effective from the standpoint of
shareholders is not sufficient to ensure they adequately protect the
safety and soundness of the organization.
A. Proposed Guidance
In October 2009, the Federal Reserve issued and requested comment
on Proposed Guidance on Sound Incentive Compensation Policies
(``proposed guidance'') to help protect the safety and soundness of
banking organizations supervised by the Federal Reserve and to promote
the prompt improvement of incentive compensation practices throughout
the banking industry.\1\ The proposed guidance was based on three key
principles. These principles provided that incentive compensation
arrangements at a banking organization should--
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\1\ 74 FR 55227 (October 27, 2009).
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Provide employees incentives that appropriately balance
risk and reward;
Be compatible with effective controls and risk-management;
and
Be supported by strong corporate governance, including
active and effective oversight by the organization's board of
directors.
Because incentive compensation arrangements for executive and non-
executive employees may pose safety and soundness risks if not properly
structured, the proposed guidance applied to senior executives as well
as other employees who, either individually or as part of a group, have
the ability to expose the relevant banking organization to material
amounts of risk.
With respect to the first principle, the proposed guidance, among
other things, provided that a banking organization should ensure that
its incentive compensation arrangements do not encourage short-term
profits at the expense of short- and longer-term risks to the
organization. Rather, the proposed guidance indicated that banking
organizations should adjust the incentive compensation provided so that
employees bear some of the risk associated with their activities. To be
fully effective, these adjustments should take account of the full
range of risks that the employees' activities may pose for the
organization. The proposed guidance highlighted several methods that
banking organizations could use to adjust incentive compensation awards
or payments to take account of risk.
With respect to the second principle, the proposed guidance
provided that banking organizations should integrate their approaches
to incentive compensation arrangements with their risk-management and
internal control frameworks to better monitor and control the risks
these arrangements may create for the organization. Accordingly, the
proposed guidance provided that banking organizations should ensure
that risk-management personnel have an appropriate role in designing
incentive compensation arrangements and assessing whether the
arrangements may encourage imprudent risk-taking. In addition, the
proposed guidance provided that banking organizations should track
incentive compensation awards and payments, risks taken, and actual
risk outcomes to
[[Page 36397]]
determine whether incentive compensation payments to employees are
reduced or adjusted to reflect adverse risk outcomes.
With respect to the third principle, the proposed guidance provided
that a banking organization's board of directors should play an
informed and active role in ensuring that the organization's
compensation arrangements strike the proper balance between risk and
profit not only at the initiation of a compensation program, but on an
ongoing basis. Thus, the proposed guidance provided that boards of
directors should review and approve key elements of their
organizations' incentive compensation systems across the organization,
receive and review periodic evaluations of whether their organizations'
compensation systems for all major segments of the organization are
achieving their risk-mitigation objectives, and directly approve the
incentive compensation arrangements for senior executives.
The Board's proposed guidance applied to all banking organizations
supervised by the Federal Reserve. However, the proposed guidance also
included provisions intended to reflect the diversity among banking
organizations, both with respect to the scope and complexity of their
activities, as well as the prevalence and scope of incentive
compensation arrangements. Thus, for example, the proposed guidance
provided that the reviews, policies, procedures, and systems
implemented by a smaller banking organization that uses incentive
compensation arrangements on a limited basis would be substantially
less extensive, formalized, and detailed than those at a large, complex
banking organization (LCBO) \2\ that uses incentive compensation
arrangements extensively. In addition, because sound incentive
compensation practices are important to protect the safety and
soundness of all banking organizations, the Federal Reserve announced
that it would work with the other Federal banking agencies to promote
application of the guidance to all banking organizations.
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\2\ In the proposed guidance (issued by the Federal Reserve),
the term LCBO was used as this is the term utilized by the Federal
Reserve in describing such organizations. The final guidance uses
the term Large Banking Organization (LBO), which encompasses
terminology utilized by the OCC, FDIC and OTS.
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The Board invited comment on all aspects of the proposed guidance.
The Board also specifically requested comments on a number of issues,
including whether:
The three core principles are appropriate and sufficient
to help ensure that incentive compensation arrangements do not threaten
the safety and soundness of banking organizations;
There are any material legal, regulatory, or other
impediments to the prompt implementation of incentive compensation
arrangements and related processes that would be consistent with those
principles;
Formulaic limits on incentive compensation would likely
promote the safety and soundness of banking organizations, whether
applied generally or to specific types of employees or banking
organizations;
Market forces or practices in the broader financial
services industry, such as the use of ``golden parachute'' or ``golden
handshake'' arrangements to retain or attract employees, present
challenges for banking organizations in developing and maintaining
balanced incentive compensation arrangements;
The proposed guidance would impose undue burdens on, or
have unintended consequences for, banking organizations, particularly
smaller, less complex organizations, and whether there are ways such
potential burdens or consequences could be addressed in a manner
consistent with safety and soundness; and
There are types of incentive compensation plans, such as
organization-wide profit sharing plans that provide for distributions
in a manner that is not materially linked to the performance of
specific employees or groups of employees, that could and should be
exempted from, or treated differently under, the guidance because they
are unlikely to affect the risk-taking incentives of all, or a
significant number of employees.
B. Supervisory Initiatives
In connection with the issuance of the proposed guidance, the
Federal Reserve announced two supervisory initiatives:
A special horizontal review of incentive compensation
practices at LCBO's; and
A review of incentive compensation practices at other
banking organizations as part of the regular, risk-focused examination
process for these organizations.
The horizontal review was designed to assess: The potential for
these arrangements or practices to encourage imprudent risk-taking; the
actions an organization has taken or proposes to take to correct
deficiencies in its incentive compensation practices; and the adequacy
of the organization's compensation-related risk-management, control,
and corporate governance processes.
II. Overview of Comments
The Board received 34 written comments on the proposed guidance,
which were shared and reviewed by all of the Agencies. Commenters
included banking organizations, financial services trade associations,
service providers to financial organizations, representatives of
institutional shareholders, labor organizations, and individuals. Most
commenters supported the goal of the proposed guidance--to ensure that
incentive compensation arrangements do not encourage imprudent or undue
risk-taking at banking organizations. Commenters also generally
supported the principles-based approach of the proposed guidance. For
example, many commenters specifically supported the avoidance of
formulaic or one-size-fits-all approaches to incentive compensation in
the proposed guidance. These commenters noted financial organizations
are very diverse and should be permitted to adopt incentive
compensation measures that fit their needs, while also being consistent
with safe and sound operations. Several commenters also asserted that a
formulaic approach would inevitably lead to exaggerated risk-taking
incentives in some situations while discouraging employees from taking
reasonable and appropriate risks in others. One commenter also argued
that unintended consequences would be more likely to result from a
``rigid rulemaking'' than from a flexible, principles-based approach.
Many commenters requested that the Board revise or clarify the
proposed guidance in one or more respects. For example, several
commenters asserted that the guidance should impose specific
restrictions on incentive compensation at banking organizations or
mandate certain corporate governance or risk-management practices. One
commenter recommended a requirement that most compensation for senior
executives be provided in the form of variable, performance-vested
equity awards that are deferred for at least five years, and that stock
option compensation be prohibited. Another commenter advocated a ban on
``golden parachute'' payments and on bonuses based on metrics related
to one year or less of performance. Other commenters suggested that the
guidance should require banking organizations to have an independent
chairman of the board of directors, require annual majority voting for
all directors, or provide for shareholders to have a vote (so called
[[Page 36398]]
``say-on-pay'' voting provisions) on the incentive compensation
arrangements for certain employees of banking organizations. Other
commenters requested that certain types of compensation plans, such as
organization-wide profit sharing plans or 401(k) plans or plans covered
by the Employee Retirement Income Security Act (29 U.S.C. 1400 et
seq.), be exempted from the scope of the guidance because they were
unlikely to provide employees incentives to expose their banking
organization to undue risk.
Several commenters, however, did not support the proposed guidance.
Some of these commenters felt that the proposed guidance was
unnecessary and that the principles used in the proposed guidance were
not needed. These commenters argued that the existing system of
financial regulation and enforcement is sufficient to address the
concerns raised in the proposed guidance. Several commenters also
thought that the proposed guidance was too vague to be helpful, and
that the ambiguity of the proposed guidance would make compliance more
difficult, leading to increased costs and regulatory uncertainty. Some
commenters also argued that the guidance was not warranted because
there is insufficient evidence that incentive compensation practices
contributed to safety and soundness or financial stability problems, or
questioned the authority of the Federal Reserve or the other Federal
banking agencies to act in this area.
In addition, a number of commenters expressed concern that the
proposed guidance would impose undue burden on banking organizations,
particularly smaller, less complex organizations. These commenters
believed that incentive compensation practices at smaller banking
organizations were generally not problematic from a safety and
soundness perspective.\3\ A number of commenters suggested that all or
most smaller banking organizations should be exempt from the guidance.
A number of commenters expressed concerns that the proposed guidance
would impose unreasonable demands on the boards of directors of banking
organizations and especially smaller organizations.
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\3\ On the other hand, one commenter requested that the proposed
guidance not be enforced differently at larger institutions solely
because of their size.
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Several commenters also expressed concern that the proposed
guidance, if implemented, could impede the ability of banking
organizations to attract or retain qualified staff and compete with
other financial services providers. In light of these concerns, some
commenters suggested that the guidance expressly allow banking
organizations to enter into such compensation arrangements as they deem
necessary for recruitment or retention purposes. A number of commenters
also encouraged the Federal Reserve to work with other domestic and
foreign supervisors and authorities to promote consistent standards for
incentive compensation practices at financial institutions and a level
competitive playing field for financial service providers.
The comments received on the proposed guidance are further
discussed below.
III. Final Guidance
After carefully reviewing the comments on the proposed guidance,
the Agencies have adopted final guidance that retains the same key
principles embodied in the proposed guidance, with a number of
adjustments and clarifications that address matters raised by the
commenters. These principles are: (1) Incentive compensation
arrangements at a banking organization should provide employees
incentives that appropriately balance risk and financial results in a
manner that does not encourage employees to expose their organizations
to imprudent risk; (2) these arrangements should be compatible with
effective controls and risk-management; and (3) these arrangements
should be supported by strong corporate governance, including active
and effective oversight by the organization's board of directors. The
Agencies believe that it is important that incentive compensation
arrangements at banking organizations do not provide incentives for
employees to take risks that could jeopardize the safety and soundness
of the organization. The final guidance seeks to address the safety and
soundness risks of incentive compensation practices by focusing on the
basic problem they can pose from a risk-management perspective, that
is, incentive compensation arrangements--if improperly structured--can
give employees incentives to take imprudent risks.
The Agencies believe the principles of the final guidance should
help protect the safety and soundness of banking organizations and the
stability of the financial system, and that adoption of the guidance is
fully consistent with the Agencies' statutory mandate to protect the
safety and soundness of banking organizations.\4\
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\4\ See, e.g. 12 U.S.C. 1818(b). The Agencies regularly issue
supervisory guidance based on the authority in section 8 of the
Federal Deposit Insurance (FDI) Act. Guidance is used to identify
practices that the Agencies believe would constitute an unsafe or
unsound practice and/or identify risk-management systems, controls,
or other practices that the Agencies believe would assist banking
organizations in ensuring that they operate in a safe and sound
manner. Savings associations should also refer to OTS's rule on
employment contracts 12 CFR 563.39.
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The final guidance applies to all the banking organizations
supervised by the Agencies, including national banks, State member
banks, State nonmember banks, savings associations, U.S. bank holding
companies, savings and loan holding companies, the U.S. operations of
foreign banks with a branch, agency or commercial lending company in
the United States, and Edge and agreement corporations (collectively,
``banking organizations'').
A number of changes have been made to the proposed guidance in
response to comments. For example, the final guidance includes several
provisions designed to reduce burden on smaller banking organizations
and other banking organizations that are not significant users of
incentive compensation. The Agencies also have made a number of changes
to clarify the scope, intent, and terminology of the final guidance.
A. Scope of Guidance
Compensation practices were not the sole cause of the financial
crisis, but they certainly were a contributing cause--a fact recognized
by 98 percent of the respondents to a survey of banking organizations
engaged in wholesale banking activities conducted in 2009 by the
Institute of International Finance and publicly by a number of
individual financial institutions.\5\ Moreover, the problems caused by
improper compensation practices were not limited to U.S. financial
institutions, but were evident at major financial institutions
worldwide, a fact recognized by international bodies such
[[Page 36399]]
as the Financial Stability Board (FSB) and the Senior Supervisors
Group.\6\
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\5\ See, Institute of International Finance, Inc. (2009),
Compensation in Financial Services: Industry Progress and the Agenda
for Change (Washington: IIF, March) available at http://www.oliverwyman.com/ow/pdf_files/OW_En_FS_Publ_2009_CompensationInFS.pdf. See also UBS, Shareholder Report on UBS's
Write-Downs, April 18, 2008, pp. 41-42 (identifies incentive effects
of UBS compensation practices as contributing factors in losses
suffered by UBS due to exposure to the subprime mortgage market)
available at http://www.ubs.com/1/ShowMedia/investors/agm?contentId=140333&name=080418ShareholderReport.pdf.
\6\ See, Financial Stability Forum (2009), FSF Principles for
Sound Compensation Practices (87 KB PDF) (Basel, Switzerland: FSF,
April), available at http://www.financialstabilityboard.org/publications/r_0904b.pdf; and Senior Supervisors Group (2009),
Risk-management Lessons from the Global Banking Crisis of 2008
(Basel, Switzerland: SSG, October), available at http://www.newyorkfed.org/newsevents/news/banking/2009/ma091021.html. The
Financial Stability Forum was renamed the Financial Stability Board
in April 2009.
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Because compensation arrangements for executive and non-executive
employees alike may pose safety and soundness risks if not properly
structured, these principles and the final guidance apply to senior
executives as well as other employees who, either individually or as
part of a group, have the ability to expose the banking organization to
material amounts of risk.\7\ These employees are referred to as
``covered employees'' in the final guidance. In response to comments,
the final guidance clarifies that an employee or group of employees has
the ability to expose a banking organization to material amounts of
risk if the employees' activities are material to the organization or
are material to a business line or operating unit that is itself
material to the organization.
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\7\ In response to a number of comments requesting clarification
regarding the scope of the term ``senior executives'' as used in the
guidance, the final guidance states that ``senior executive''
includes, at a minimum, ``executive officers'' within the meaning of
the Board's Regulation O (12 CFR 215.2(e)(1)) and, for publicly
traded companies, ``named officers'' within the meaning of the
Securities and Exchange Commission's rules on disclosure of
executive compensation (17 CFR 229.402(a)(3)). Savings associations
should also refer to OTS's rule on loans by savings associations to
their executive officers, directors, and principal shareholders. 12
CFR 563.43.
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Some commenters suggested that certain categories of employees,
such as tellers, bookkeepers, administrative assistants, or employees
who process but do not originate transactions, do not expose banking
organizations to significant levels of risk and therefore should be
exempted from coverage under the final guidance. The final guidance,
like the proposed guidance, indicates that the facts and circumstances
will determine which jobs or categories of employees have the ability
to expose the organization to material risks and which jobs or
categories of employees may be outside the scope of the guidance. The
final guidance recognizes, for example, that tellers, bookkeepers,
couriers, and data processing personnel would likely not expose
organizations to significant risks of the types meant to be addressed
by the guidance. On the other hand, employees or groups of employees
who do not originate business or approve transactions could still
expose a banking organization to material risk in some circumstances.
Therefore, the Agencies do not believe it would be appropriate to
provide a blanket exemption from the final guidance for any category of
covered employees that would apply to all banking organizations.
After reviewing the comments, the Agencies have retained the
principles-based framework of the proposed guidance. The Agencies
believe this approach is the most effective way to address incentive
compensation practices, given the differences in the size and
complexity of banking organizations covered by the guidance and the
complexity, diversity, and range of use of incentive compensation
arrangements by those organizations. For example, activities and risks
may vary significantly across banking organizations and across
employees within a particular banking organization. For this reason,
the methods used to achieve appropriately risk-sensitive compensation
arrangements likely will differ across and within organizations, and
use of a single, formulaic approach likely will provide at least some
employees with incentives to take imprudent risks.
The Agencies, however, have not modified the guidance, as some
commenters requested, to provide that a banking organization may enter
into incentive compensation arrangements that are inconsistent with the
principles of safety and soundness whenever the organization believes
that such action is needed to retain or attract employees. The Agencies
recognize that while incentive compensation serves a number of
important goals for banking organizations, including attracting and
retaining skilled staff, these goals do not override the requirement
for banking organizations to have incentive compensation systems that
are consistent with safe and sound operations and that do not encourage
imprudent risk-taking. The final guidance provides banking
organizations with considerable flexibility in structuring their
incentive compensation arrangements in ways that both promote safety
and soundness and that help achieve the arrangements' other objectives.
The Agencies are mindful, however, that banking organizations
operate in both domestic and international competitive environments
that include financial services providers that are not subject to
prudential oversight by the Agencies and, thus, not subject to the
final guidance. The Agencies also recognize that international
coordination in this area is important both to promote competitive
balance and to ensure that internationally active banking organizations
are subject to consistent requirements. For this reason, the Agencies
will continue to work with their domestic and international
counterparts to foster sound compensation practices across the
financial services industry. Importantly, the final guidance is
consistent with both the Principles for Sound Compensation Practices
and the related Implementation Standards adopted by the FSB in 2009.\8\
A number of commenters expressed concern about the levels of
compensation paid to some employees of banking organizations. As noted
above, several commenters requested that the Board eliminate or limit
certain types of incentive compensation for employees of banking
organizations. Other commenters advocated that certain forms of
compensation be required. For example, some commenters urged a ban on
incentive compensation payments made in stock options, while others
supported their mandatory use. Comments also were received with regard
to the use of other types of stock-based compensation, such as
restricted stock and stock appreciation rights. Consistent with its
principles-based approach, the final guidance does not mandate or
prohibit the use of any specific forms of payment for incentive
compensation or establish mandatory compensation levels or caps.
Rather, the forms and levels of incentive compensation payments at
banking organizations are expected to reflect the principles of the
final guidance in a manner tailored to the business, risk profile, and
other attributes of the banking organization. Incentive compensation
structures that offer employees rewards for increasing short-term
profit or revenue, without taking into account risk, may encourage
imprudent risk-taking even if they meet formulaic levels or include or
exclude certain forms of compensation. On the other hand, incentive
compensation arrangements of various forms and levels may be properly
structured so as not to encourage imprudent risk-taking.
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\8\ See, Financial Stability Forum, FSF Principles for Sound
Compensation Practices, in note 6; and Financial Stability Board
(2009), FSB Principles for Sound Compensation Practices:
Implementation Standards (35 KB PDF) (Basel, Switzerland: FSB,
September), available at http://www.financialstabilityboard.org/publications/r_090925c.pdf.
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In response to comments, the final guidance clarifies in a number
of respects the expectation of the Agencies that the impact of the
final guidance on
[[Page 36400]]
banking organizations will vary depending on the size and complexity of
the organization and its level of usage of incentive compensation
arrangements. It is expected that the guidance will generally have less
impact on smaller banking organizations, which typically are less
complex and make less use of incentive compensation arrangements than
larger banking organizations. Because of the size and complexity of
their operations, large banking organizations (LBOs) \9\ should have
and adhere to systematic and formalized policies, procedures and
processes. These are considered important in ensuring that incentive
compensation arrangements for all covered employees are identified and
reviewed by appropriate levels of management (including the board of
directors where appropriate and control units), and that they
appropriately balance risks and rewards . The final guidance highlights
the types of policies, procedures, and systems that LBOs should have
and maintain, but that are not expected of other banking organizations.
It is expected that, particularly in the case of LBO's, adoption of
this principles-based approach will require an iterative supervisory
process to ensure that the embedded flexibility that allows for
customized arrangements for each banking organization does not
undermine effective implementation of the guidance.
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\9\ For purposes of the final guidance, LBOs include, in the
case of banking organizations supervised by (i) the Federal Reserve,
large, complex banking organizations as identified by the Federal
Reserve for supervisory purposes; (ii) the OCC, the largest and most
complex national banks as defined in the Large Bank Supervision
booklet of the Comptroller's Handbook; (iii) the FDIC, large complex
insured depository institutions (IDIs); and (iv) the OTS, the
largest and most complex savings associations and savings and loan
holding companies. The term ``smaller banking organizations'' is
used to refer to banking organizations that are not LBOs under the
relevant agency's standard.
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With respect to U.S. operations of foreign banks, incentive
compensation policies, including management, review, and approval
requirements for a foreign bank's U.S. operations should be coordinated
with the foreign banking organization's group-wide policies developed
in accordance with the rules of the foreign banking organization's home
country supervisor. These policies and practices should be consistent
with the foreign bank's overall corporate and management structure and
its framework for risk-management and internal controls, as well as
with the final guidance.
B. Balanced Incentive Compensation Arrangements
The first principle of the final guidance is that incentive
compensation arrangements should provide employees incentives that
appropriately balance risks and rewards in a manner that does not
encourage imprudent risk-taking. The amounts of incentive pay flowing
to covered employees should take account of and adjust for the risks
and losses--as well as gains--associated with employees' activities, so
that employees do not have incentives to take imprudent risk. The
formulation of this principle is slightly different from that used in
the proposed guidance, which stated that organizations should provide
employees incentives that do not encourage imprudent risk-taking beyond
the organization's ability to effectively identify and manage risk.
This change was made to clarify that risk-management procedures and
control functions that ordinarily limit risk-taking do not obviate the
need to identify covered employees and to develop incentive
compensation arrangements that properly balance risk-taking incentives.
To be fully effective, balancing adjustments to incentive compensation
arrangements should take account of the full range of risks that
employees' activities may pose for the organization, including credit,
market, liquidity, operational, legal, compliance, and reputational
risks.
A number of commenters expressed the view that increased controls
could mitigate a lack of balance in incentive compensation
arrangements. Under this view, unbalanced incentive compensation
arrangements could be addressed either through the modification of the
incentive compensation arrangements or through the application of
additional or more effective risk controls to the business. The final
guidance recognizes that strong and effective risk-management and
internal control functions are critical to the safety and soundness of
banking organizations. However, the Agencies believe that poorly
designed or managed incentive compensation arrangements can themselves
be a source of risk to banking organizations and undermine the controls
in place. Unbalanced incentive compensation arrangements can place
substantial strain on the risk-management and internal control
functions of even well-managed organizations. Furthermore, poorly
balanced incentive compensation arrangements can encourage employees to
take affirmative actions to weaken the organization's risk-management
or internal control functions.
The final guidance, like the proposed guidance, outlines four
methods that are currently in use to make compensation more sensitive
to risk. These are risk adjustment of awards; deferral of payment;
longer performance periods; and reduced sensitivity to short-term
performance. Each method has advantages and disadvantages. For example,
incentive compensation arrangements for senior executives at LBOs are
likely to be better balanced if they involve deferral of a substantial
portion of the executives' incentive compensation over a multi-year
period, with payment made in the form of stock or other equity-based
instruments and with the number of instruments ultimately received
dependent on the performance of the organization (or, ideally, the
performance of the executive) during the deferral period. Deferral,
however, may not be effective in constraining the incentives of
employees who may have the ability to expose the organization to long-
term risks, as these risks may not be realized during a reasonable
deferral period. For this reason, the final guidance recognizes that in
some cases, two or more methods may be needed in combination (e.g.,
risk adjustment of awards and deferral of payment) to achieve an
incentive compensation arrangement that properly balances risk and
reward.
Furthermore, the few methods noted in the final guidance are not
exclusive, and other effective methods or variations may exist or be
developed. Methods for achieving balanced compensation arrangements at
one organization may not be effective at another organization. Each
organization is responsible for ensuring that its incentive
compensation arrangements are consistent with the safety and soundness
of the organization. The guidance clarifies that LBOs should actively
monitor industry, academic, and regulatory developments in incentive
compensation practices and theory and be prepared to incorporate into
their incentive compensation systems new or emerging methods that are
likely to improve the organization's long-term financial well-being and
safety and soundness.
In response to a question asked in the proposed guidance, several
commenters requested that certain types of compensation plans be
treated as beyond the scope of the final guidance because commenters
believed these plans do not threaten the safety and soundness of
banking organizations. These included organization-wide profit sharing
plans, 401(k) plans, defined benefit plans, and ERISA plans.
[[Page 36401]]
The final guidance does not exempt any broad categories of
compensation plans based on their tax structure, corporate form, or
status as a retirement or other employee benefit plans, because any
type of incentive compensation plan may be implemented in a way that
increases risk inappropriately. In response to these comments, however,
the final guidance recognizes that the term ``incentive compensation''
does not include arrangements that are based solely on the employees'
level of compensation and that do not vary based on one or more
performance metrics (e.g., a 401(k) plan under which the organization
contributes a set percentage of an employee's salary). In addition, the
final guidance notes that incentive compensation plans that provide for
awards based solely on overall organization-wide performance are
unlikely to provide employees, other than senior executives and
individuals who have the ability to materially affect the
organization's overall performance, with unbalanced risk-taking
incentives.
In many cases, there were comments on both sides of an issue, with
some wanting less or no guidance and others wanting tough, or very
specific prohibitions. For example, a number of commenters argued that
the use of ``golden parachutes'' and similar retention and recruitment
provisions to retain employees should be prohibited because such
provisions have been abused in the past.\10\ A larger number of
commenters, however, argued against a per se ban on such arrangements,
stating that these provisions were in some cases essential elements of
effective recruiting and retention packages and are not necessarily a
threat to safety and soundness. One commenter stated that golden
parachute payments triggered by changes in control of a banking
organization are too speculative to encourage imprudent risk-taking by
employees.
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\10\ Arrangements that provide for an employee (typically a
senior executive), upon departure from an organization or a change
in control of the organization, to receive large additional payments
or the accelerated payment of deferred amounts without regard to
risk or risk outcomes are sometimes called ``golden parachutes.''
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The final guidance, like the proposed guidance, provides that
banking organizations should carefully consider the potential for
golden parachutes and similar arrangements to affect the risk-taking
behavior of employees. The final guidance adds language noting that
arrangements that provide an employee with a guaranteed payout upon
departure from an organization regardless of performance may neutralize
the effect of any balancing features included in the arrangement to
help prevent imprudent risk-taking. Organizations should consider
including balancing features--such as risk adjustments or deferral
requirements--in golden parachutes and similar arrangements to mitigate
the potential for the arrangements to encourage imprudent risk-taking.
Provisions that require a departing employee to forfeit deferred
incentive compensation payments may also weaken the effectiveness of a
deferral arrangement if the departing employee is able to negotiate a
``golden handshake'' arrangement with the employee's new
organization.\11\ Golden handshake provisions present special issues
for banking organizations and supervisors, some of which are discussed
in the final guidance, because it is the action of the employee's new
employer--which may not be a regulated institution--that can affect the
current employer's ability to properly align the employee's interest
with the organization's long-term health. The final guidance states
that LBOs should monitor whether golden handshake arrangements are
materially weakening the organization's efforts to constrain the risk-
taking incentives of employees. The Agencies will continue to work with
banking organizations and others to develop appropriate methods for
addressing any effect that such arrangements may have on the safety and
soundness of banking organizations.
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\11\ Golden handshakes are arrangements that compensate an
employee for some or all of the estimated, non-adjusted value of
deferred incentive compensation that would have been forfeited upon
departure from the employee's previous employment.
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C. Compatibility With Effective Controls and Risk-Management
The second principle of the final guidance states that a banking
organization's risk-management processes and internal controls should
reinforce and support the development and maintenance of balanced
incentive compensation arrangements. Banking organizations should
integrate incentive compensation arrangements into their risk-
management and internal control frameworks to ensure that balance is
achieved. In particular, banking organizations should have appropriate
controls to ensure that processes for achieving balance are followed.
Appropriate personnel, including risk-management personnel, should have
input in the design and assessment of incentive compensation
arrangements. Compensation for risk-management and control personnel
should be sufficient to attract and retain appropriately qualified
personnel and such compensation should not be based substantially on
the financial performance of the business unit that they review.
Rather, their performance should be based primarily on the achievement
of the objectives of their functions (e.g., adherence to internal
controls).
Banking organizations should monitor incentive compensation awards,
risks taken and actual risk outcomes to determine whether incentive
compensation payments to employees are reduced to reflect adverse risk
outcomes. Incentive compensation arrangements that are found not to
appropriately reflect risk should be modified as necessary.
Organizations should not only provide rewards when performance
standards are met or exceeded, they should also reduce compensation
when standards are not met. If senior executives or other employees are
paid substantially all of their potential incentive compensation when
risk outcomes are materially worse than expected, employees may be
encouraged to take large risks in the hope of substantially increasing
their personal compensation, knowing that their downside risks are
limited. Simply put, incentive compensation arrangements should not
create a ``heads I win, tails the firm loses'' expectation.
A significant number of comments expressed concerns about the scope
of the applicability of the proposed guidance to smaller banking
organizations as well as the burden the proposed guidance would impose
on these organizations. In response to these comments, the final
guidance has made more explicit the Agencies' view that the monitoring
methods and processes used by a banking organization should be
commensurate with the size and complexity of the organization, as well
as its use of incentive compensation. Thus, for example, a smaller
organization that uses incentive compensation only to a limited extent
may find that it can appropriately monitor its arrangements through
normal management processes. The final guidance also discusses specific
aspects of policies and procedures related to controls and risk-
management that are applicable to LBOs and are not expected of other
banking organizations.
D. Strong Corporate Governance
The third principle of the final guidance is that incentive
compensation programs at banking organizations should be supported by
strong corporate governance, including active and effective oversight
by the organization's
[[Page 36402]]
board of directors.\12\ The board of directors of an organization is
ultimately responsible for ensuring that the organization's incentive
compensation arrangements for all covered employees--not solely senior
executives--are appropriately balanced and do not jeopardize the safety
and soundness of the organization. Boards of directors should receive
data and analysis from management or other sources that are sufficient
to allow the board to assess whether the overall design and performance
of the organization's incentive compensation arrangements are
consistent with the organization's safety and soundness. These reviews
and reports should be appropriately scoped to reflect the size and
complexity of the banking organization's activities and the prevalence
and scope of its incentive compensation arrangements. The structure,
composition, and resources of the board of directors should be
constructed to permit effective oversight of incentive compensation.
The board of directors should, for example, have, or have access to, a
level of expertise and experience in risk-management and compensation
practices in the financial services sector that is appropriate for the
nature, scope, and complexity of the organization's activities.\13\
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\12\ In the case of foreign banking organizations (FBOs), the
term ``board of directors'' refers to the relevant oversight body
for the firm's U.S. operations, consistent with the FBO's overall
corporate and management structure.
\13\ Savings associations should also refer to OTS's rule on
directors, officers, and employees. 12 CFR 563.33.
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Given the key role of senior executives in managing the overall
risk-taking activities of an organization, the board of directors
should directly approve compensation arrangements involving senior
executives and closely monitor such payments and their sensitivity to
risk outcomes. If the compensation arrangements for a senior executive
include a deferral of payment or ``clawback'' provision, then the
review should include sufficient information to determine if the
provision has been triggered and executed as planned. The board also
should approve and document any material exceptions or adjustments to
the incentive compensation arrangements established for senior
executives and should carefully consider and monitor the effects of any
approved exceptions or adjustments to the arrangements.
In response to comments expressing concern about the impact of the
proposed guidance on smaller banking organizations, the final guidance
identifies specific aspects of the corporate governance provisions of
the final guidance that are applicable to LBOs or other organizations
that use incentive compensation to a significant degree, and are not
expected of other banking organizations. In particular, boards of
directors of LBOs and other organizations that use incentive
compensation to a significant degree should actively oversee the
development and operation of the organization's incentive compensation
policies, systems and related control processes. If such an
organization does not already have a compensation committee, reporting
to the full board, with primary responsibility for incentive
compensation arrangements, the board should consider establishing one.
LBOs, in particular, should follow a systematic approach, outlined in
the final guidance, in developing compensation systems that have
balanced incentive compensation arrangements.
Several commenters expressed concern that the proposed guidance
appeared to create a new substantive qualification for boards of
directors that requires the boards of all banking organizations to have
members with expertise in compensation and risk-management issues. A
group of commenters noted that such a requirement could limit an
already small pool of people suitable to serve on boards of directors
of banking organizations and that smaller organizations may not have
access to, or the resources to compensate, directors meeting these
additional requirements. Some commenters also stated that terms such as
``closely monitor'' and ``actively oversee'' could be read to impose a
higher standard on directors for their oversight of incentive
compensation issues. On the other hand, one commenter noted that
current law requires financial expertise on the boards of directors and
audit committees of public companies and recommended that specialized
risk-management competencies be required on the boards of all banking
organizations.
To address concerns raised by these commenters, the final guidance
clarifies that risk-management and compensation expertise and
experience at the board level may be present collectively among the
members of the board, and may come from formal training or from
experience in addressing risk-management and compensation issues,
including as a director, or may be obtained from advice received from
outside counsel, consultants, or other experts with expertise in
incentive compensation and risk-management. Furthermore, the final
guidance recognizes that smaller organizations with less complex and
extensive incentive compensation arrangements may not find it necessary
or appropriate to require specially tailored board expertise or to
retain and use outside experts in this area.
A banking organization's disclosure practices should support safe
and sound incentive compensation arrangements. Specifically, a banking
organization should supply an appropriate amount of information
concerning its incentive compensation arrangements and related risk-
management, control, and governance processes to shareholders to allow
them to monitor and, where appropriate, take actions to restrain the
potential for such arrangements to encourage employees to take
imprudent risks.
While some commenters supported increased public disclosure of the
incentive compensation practices of banking organizations, a greater
number expressed concerns that any required disclosures of incentive
compensation information by banking organizations be tailored to
protect the privacy of employees and take account of the impact of such
disclosures on the ability of organizations to attract and retain
talent. Several commenters supported an alignment of required
disclosures with existing requirements for public companies, arguing
that additional requirements would add to the regulatory burden on
banking organizations.
The proposed guidance did not impose specific disclosure
requirements on banking organizations. The final guidance makes no
significant changes from the proposed guidance with regard to
disclosures, and states that the scope and level of information
disclosed by a banking organization should be tailored to the nature
and complexity of the organization and its incentive compensation
arrangements. The final guidance notes that banking organizations
should comply with the incentive compensation disclosure requirements
of the Federal securities law and other laws, as applicable.
A number of commenters supported additional governance requirements
for banking organizations, such as ``say on pay'' provisions requiring
shareholder approval of compensation plans, separation of the board
chair and chief executive officer positions, majority voting for
directors, annual elections for all directors, and improvements to the
audit function. Some of these comments seek changes in Federal laws
beyond the jurisdiction of the Agencies; others
[[Page 36403]]
address issues--such as ``say on pay'' requirements--that are currently
under consideration by the Congress. The final guidance does not
preempt or preclude these proposals, and indicates that the Agencies
expect organizations to comply with all applicable statutory
disclosure, voting and other requirements.
E. Continuing Supervisory Initiatives
The horizontal review of incentive compensation practices at LBOs
is well underway. While this initiative is being led by the Federal
Reserve, the other Federal banking agencies are participating in the
work. Supervisory teams have collected substantial information from
LBOs concerning existing incentive compensation practices and related
risk-management and corporate governance processes. In addition, LBOs
have submitted analyses of shortcomings or ``gaps'' in existing
practices relative to the principles contained in the proposed
guidance, as well as plans for addressing identified weaknesses. Some
organizations already have implemented changes to make their incentive
compensation arrangements more risk sensitive. Indeed, many
organizations are recognizing that strong risk-management and control
systems are not sufficient to protect the organization from undue
risks, including risks arising from unbalanced incentive compensation
arrangements. Other organizations have considerably more work to do,
such as developing processes that can effectively compare incentive
compensation payments to risks and risk outcomes. The Agencies intend
to continue to regularly review incentive compensation arrangements and
related risk-management, control, and corporate governance practices of
LBOs and to work with these organizations through the supervisory
process to promptly correct any deficiencies that may be inconsistent
with safety and soundness.\14\
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\14\ For smaller banking organizations, the Federal Reserve is
gathering consistent information through regularly scheduled
examinations and the normal supervisory process. The focus of the
data gathering is to identify the types of incentive plans in place,
the job types covered and the characteristics, prevalence and level
of documentation available for those incentive compensation plans.
After comparing and analyzing the information collected, supervisory
efforts and expectations will be scaled appropriately to the size
and complexity of the organization and its incentive compensation
arrangements. For these smaller banking organizations, the
expectation is that there will be very limited, if any, targeted
examination work or supervisory follow-up. To the extent that any of
these organizations has incentive compensation arrangements, the
policies and systems necessary to monitor these arrangements are
expected to be substantially less extensive, formalized and detailed
than those of larger, more complex organizations.
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The Agencies intend to actively monitor the actions being taken by
banking organizations with respect to incentive compensation
arrangements and will review and update this guidance as appropriate to
incorporate best practices that emerge. In addition, in order to
monitor and encourage improvements, Federal Reserve staff will prepare
a report, in consultation with the other Federal banking agencies,
after the conclusion of 2010 on trends and developments in compensation
practices at banking organizations.
IV. Other Matters
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Agencies have
determined that certain aspects of the final guidance constitute a
collection of information. The Board made this determination under the
authority delegated to the Board by the Office of Management and Budget
(OMB).
An agency may not conduct or sponsor, and an organization is not
required to respond to, an information collection unless the
information collection displays a currently valid OMB control number.
Any changes to the Agencies' regulatory reporting forms that may be
made in the future to collect information related to incentive
compensation arrangements would be addressed in a separate Federal
Register notice.
The final guidance includes provisions that state large banking
organizations (LBOs) should (i) have policies and procedures that
identify and describe the role(s) of the personnel and units authorized
to be involved in incentive compensation arrangements, identify the
source of significant risk-related inputs, establish appropriate
controls governing these inputs to help ensure their integrity, and
identify the individual(s) and unit(s) whose approval is necessary for
the establishment or modification of incentive compensation
arrangements; (ii) create and maintain sufficient documentation to
permit an audit of the organization's processes for incentive
compensation arrangements; (iii) have any material exceptions or
adjustments to the incentive compensation arrangements established for
senior executives approved and documented by its board of directors;
and (iv) have its board of directors receive and review, on an annual
or more frequent basis, an assessment by management of the
effectiveness of the design and operation of the organization's
incentive compensation system in providing risk-taking incentives that
are consistent with the organization's safety and soundness.
The OCC, FDIC, and OTS have obtained emergency approval under 5 CFR
1320.13 for issuance of the guidance and will issue a Federal Register
notice shortly for 60 days of comment as part of the regular PRA
clearance process. During the regular PRA clearance process the
estimated average response time may be re-evaluated.
The Board has approved the collection of information under its
delegated authority. As discussed earlier in this notice, on October
27, 2009, the Board published in the Federal Register a notice
requesting comment on the proposed Guidance on Sound Incentive
Compensation Policies (74 FR 55227). The comment period for this notice
expired November 27, 2009. The Board received three comments that
specifically addressed paperwork burden. The commenters asserted that
the hourly estimate of the cost of compliance should be considerably
higher than the Board projected.
The final guidance clarifies in a number of respects the
expectation that the effect of the final guidance on banking
organizations will vary depending on the size and complexity of the
organization and its level of use of incentive compensation
arrangements. For example, the final guidance makes more explicit the
view that the monitoring methods and processes used by a banking
organization should be commensurate with the size and complexity of the
organization, as well as its use of incentive compensation. In
addition, the final guidance highlights the types of policies,
procedures, systems, and specific aspects of corporate governance that
LBOs should have and maintain, but that are not expected of other
banking organizations.
In response to comments and taking into account the considerations
discussed above, the Board is increasing the burden estimate for
implementing or modifying policies and procedures to monitor incentive
compensation. For this purpose, consideration of burden is limited to
items in the final guidance constituting an information collection
within the meaning of the PRA. The Board estimates that 1,502 large
respondents would take, on average, 480 hours (two months) to modify
policies and procedures to monitor incentive compensation. The Board
estimates that 5,058 small respondents would take, on average, 80 hours
(two business weeks)
[[Page 36404]]
to establish or modify policies and procedures to monitor incentive
compensation. The total one-time burden is estimated to be 1,125,600
hours. In addition, the Board estimates that, on a continuing basis,
respondents would take, on average, 40 hours (one business week) each
year to maintain policies and procedures to monitor incentive
compensation arrangements and estimates the annual on-going burden to
be 262,400 hours. The total annual PRA burden for this information
collection is estimated to be 1,388,000 hours.
General Description of Report
This information collection is authorized pursuant to:
Board--Sections 11(a), 11(i), 25, and 25A of the Federal Reserve
Act (12 U.S.C. 248(a), 248(i), 602, and 611,), section 5 of the Bank
Holding Company Act (12 U.S.C. 1844), and section 7(c) of the
International Banking Act (12 U.S.C. 3105(c)).
OCC--12 U.S.C. 161, and Section 39 of the Federal Deposit Insurance
Act (12 U.S.C. 1831p-1).
FDIC--Section 39 of the Federal Deposit Insurance Act (12 U.S.C.
1831p-1).
OTS--Section 39 of the Federal Deposit Insurance Act (12 U.S.C.
1831p-1) and Sections 4, 5, and 10 of the Home Owners' Loan Act (12
U.S.C. 1463, 1464, and 1467a).
The Agencies expect to review the policies and procedures for
incentive compensation arrangements as part of their supervisory
processes. To the extent the Agencies collect information during an
examination of a banking organization, confidential treatment may be
afforded to the records under exemption 8 of the Freedom of Information
Act (FOIA), 5 U.S.C. 552(b)(8).
Board
Title of Information Collection: Recordkeeping Provisions
Associated with the Guidance on Sound Incentive Compensation Policies.
Agency form number: FR 4027.
OMB control number: 7100--to be assigned.
Frequency: Annually.
Affected Public: Businesses or other for-profit.
Respondents: U.S. bank holding companies, State member banks, Edge
and agreement corporations, and the U.S. operations of foreign banks
with a branch, agency, or commercial lending company subsidiary in the
United States.
Estimated average hours per response: Implementing or modifying
policies and procedures: large respondents 480 hours; small respondents
80 hours. Maintenance of policies and procedures: 40 hours.
Estimated number of respondents: Large respondents, 1,502; Small
respondents, 5,058.
Estimated total annual burden: 1,388,000 hours.
As mentioned above, the OCC, FDIC, and OTS have obtained emergency
approval under 5 CFR 1320.13. The OCC and OTS approvals were obtained
prior to the Board revising its burden estimates based on the comments
received. For this reason, the OCC and OTS are publishing in this
notice the original burden estimates. They will issue a Federal
Register notice shortly for 60 days of comment as part of the regular
PRA clearance process. During the regular PRA clearance process the
estimated average response time may be re-evaluated based on comments
received. The FDIC is publishing in this notice the revised burden
estimates developed by the Board based on the comments received. The
FDIC will issue a Federal Register notice shortly for 60 days of
comment as part of the regular PRA clearance process and, during the
regular PRA clearance process, the estimated average response time may
be re-evaluated based on comments received.
OCC
Title of Information Collection: Guidance on Sound Incentive
Compensation Policies.
Agency form number: N/A.
OMB control number: 1557-0245.
Frequency: Annually.
Affected Public: Businesses or other for-profit.
Respondents: National banks.
Estimated average hours per response: 40 hours.
Estimated number of respondents: 1,650.
Estimated total annual burden: 66,000 hours.
FDIC
Title of Information Collection: Guidance on Sound Incentive
Compensation Policies.
Agency form number: N/A.
OMB control number: 3064-0175.
Frequency: Annually.
Affected Public: Businesses or other for-profit.
Respondents: Insured State nonmember banks.
Estimated average hours per response: Implementing or modifying
policies and procedures: large respondents 480 hours; small respondents
80 hours. Maintenance of policies and procedures: 40 hours.
Estimated number of respondents: Implementing or modifying policies
and procedures: large respondents--20; small respondents--4,870;
Maintenance of policies and procedures: 4,890.
Estimated total annual burden: 594,800 hours.
OTS
Title of Information Collection: Sound Incentive Compensation
Guidance.
Agency form number: N/A.
OMB control number: 1550-0129.
Frequency: Annually.
Affected Public: Businesses or other for-profit.
Respondents: Savings associations.
Estimated average hours per response: 40 hours.
Estimated number of respondents: 765.
Estimated total annual burden: 30,600 hours.
The Agencies have a continuing interest in the public's opinions of
our collections of information. At any time, comments regarding the
burden estimate or any other aspect of this collection of information,
including suggestions for reducing the burden, may be sent to:
Board
Secretary, Board of Governors of the Federal Reserve System, 20th
and C Streets, NW., Washington, DC 20551.
OCC
Communications Division, Office of the Comptroller of the Currency,
Mailstop 2-3, Attention: 1557-0245, 250 E Street, SW., Washington, DC
20219. In addition, comments may be sent by fax to (202) 874-5274 or by
electronic mail to [email protected]. You may personally
inspect and photocopy comments at the OCC, 250 E Street, SW.,
Washington, DC 20219. For security reasons, the OCC requires that
visitors make an appointment to inspect comments. You may do so by
calling (202) 874-4700. Upon arrival, visitors will be required to
present valid government-issued photo identification and to submit to
security screening in order to inspect and photocopy comments.
FDIC
All comments should refer to the name of the collection, ``Guidance
on Sound Incentive Compensation Policies.'' Comments may be submitted
by any of the following methods:
http:[sol][sol]www.FDIC.gov/regulations/laws/federal/
propose.html.
E-mail: [email protected].
Mail: Gary Kuiper (202.898.3877), Counsel, Federal Deposit
Insurance
[[Page 36405]]
Corporation, F-1072, 550 17th Street, NW., Washington, DC 20429.
Hand Delivery: Comments may be hand-delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street), on business days between 7 a.m. and 5 p.m.
OTS
Information Collection Comments, Chief Counsel's Office, Office of
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552; send a
facsimile transmission to (202) 906-6518; or send an e-mail to
[email protected]. OTS will post comments and the
related index on the OTS Internet Site at
http:[sol][sol]www.ots.treas.gov. In addition, interested persons may
inspect comments at the Public Reading Room, 1700 G Street, NW.,
Washington DC 20552 by appointment. To make an appointment, call (202)
906-5922, send an e-mail to public.info@ots.treas.gov">public.info@ots.treas.gov, or send a
facsimile transmission to (202) 906-7755.
OMB
Additionally, please send a copy of your comments by mail to:
Office of Management and Budget, 725 17th Street, NW., 10235,
Paperwork Reduction Project (insert Agency OMB control number),
Washington, DC 20503. Comments can also be sent by fax to (202) 395-
6974.
While the Regulatory Flexibility Act (5 U.S.C. 603(b)) does not
apply to this guidance, because it is not being adopted as a rule, the
Agencies have considered the potential impact of the proposed guidance
on small banking organizations. For the reasons discussed in the
SUPPLEMENTARY INFORMATION above, the Agencies believe that issuance of
the proposed guidance is needed to help ensure that incentive
compensation arrangements do not pose a threat to the safety and
soundness of banking organizations, including small banking
organizations. The Board in the proposed guidance sought comment on
whether the guidance would impose undue burdens on, or have unintended
consequences for, small organizations and whether there were ways such
potential burdens or consequences could be addressed in a manner
consistent with safety and soundness.
It is estimated that the guidance will apply to 8,763 small banking
organizations. See 13 CFR 121.201. As noted in the ``Supplementary
Information'' above, a number of commenters expressed concern that the
proposed guidance would impose undue burden on smaller organizations.
The Agencies have carefully considered the comments received on this
issue. In response to these comments, the final guidance includes
several provisions designed to reduce burden on smaller banking
organizations. For example, the final guidance has made more explicit
the Agencies' view that the monitoring methods and processes used by a
banking organization should be commensurate with the size and
complexity of the organization, as well as its use of incentive
compensation. The final guidance also highlights the types of policies,
procedures, and systems that LBOs should have and maintain, but that
are not expected of other banking organizations. Like the proposed
guidance, the final guidance focuses on those employees who have the
ability, either individually or as part of a group, to expose a banking
organization to material amounts of risk and is tailored to account for
the differences between large and small banking organizations.
V. Final Guidance
The text of the final guidance is as follows:
Guidance on Sound Incentive Compensation Policies
I. Introduction
Incentive compensation practices in the financial industry were one
of many factors contributing to the financial crisis that began in mid-
2007. Banking organizations too often rewarded employees for increasing
the organization's revenue or short-term profit without adequate
recognition of the risks the employees' activities posed to the
organization.\1\ These practices exacerbated the risks and losses at a
number of banking organizations and resulted in the misalignment of the
interests of employees with the long-term well-being and safety and
soundness of their organizations. This document provides guidance on
sound incentive compensation practices to banking organizations
supervised by the Federal Reserve, the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, and the Office of
Thrift Supervision (collectively, the ``Agencies'').\2\ This guidance
is intended to assist banking organizations in designing and
implementing incentive compensation arrangements and related policies
and procedures that effectively consider potential risks and risk
outcomes.\3\
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\1\ Examples of risks that may present a threat to the
organization's safety and soundness include credit, market,
liquidity, operational, legal, compliance, and reputational risks.
\2\ As used in this guidance, the term ``banking organization''
includes national banks, State member banks, State nonmember banks,
savings associations, U.S. bank holding companies, savings and loan
holding companies, Edge and agreement corporations, and the U.S.
operations of foreign banking organizations (FBOs) with a branch,
agency, or commercial lending company in the United States.
\3\ This guidance and the principles reflected herein are
consistent with the Principles for Sound Compensation Practices
issued by the Financial Stability Board (FSB) in April 2009, and
with the FSB's Implementation Standards for those principles, issued
in September 2009.
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Alignment of incentives provided to employees with the interests of
shareholders of the organization often also benefits safety and
soundness. However, aligning employee incentives with the interests of
shareholders is not always sufficient to address safety-and-soundness
concerns. Because of the presence of the Federal safety net, (including
the ability of insured depository institutions to raise insured
deposits and access the Federal Reserve's discount window and payment
services), shareholders of a banking organization in some cases may be
willing to tolerate a degree of risk that is inconsistent with the
organization's safety and soundness. Accordingly, the Agencies expect
banking organizations to maintain incentive compensation practices that
are consistent with safety and soundness, even when these practices go
beyond those needed to align shareholder and employee interests.
To be consistent with safety and soundness, incentive compensation
arrangements \4\ at a banking organization should:
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\4\ In this guidance, the term ``incentive compensation'' refers
to that portion of an employee's current or potential compensation
that is tied to achievement of one or more specific metrics (e.g., a
level of sales, revenue, or income). Incentive compensation does not
include compensation that is awarded solely for, and the payment of
which is solely tied to, continued employment (e.g., salary). In
addition, the term does not include compensation arrangements that
are determined based solely on the employee's level of compensation
and does not vary based on one or more performance metrics (e.g., a
401(k) plan under which the organization contributes a set
percentage of an employee's salary).
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Provide employees incentives that appropriately balance
risk and reward;
Be compatible with effective controls and risk-management;
and
Be supported by strong corporate governance, including
active and effective oversight by the organization's board of
directors.
These principles, and the types of policies, procedures, and
systems that banking organizations should have to help ensure
compliance with them, are discussed later in this guidance.
The Agencies expect banking organizations to regularly review their
incentive compensation arrangements
[[Page 36406]]
for all executive and non-executive employees who, either individually
or as part of a group, have the ability to expose the organization to
material amounts of risk, as well as to regularly review the risk-
management, control, and corporate governance processes related to
these arrangements. Banking organizations should immediately address
any identified deficiencies in these arrangements or processes that are
inconsistent with safety and soundness. Banking organizations are
responsible for ensuring that their incentive compensation arrangements
are consistent with the principles described in this guidance and that
they do not encourage employees to expose the organization to imprudent
risks that may pose a threat to the safety and soundness of the
organization.
The Agencies recognize that incentive compensation arrangements
often seek to serve several important and worthy objectives. For
example, incentive compensation arrangements may be used to help
attract skilled staff, induce better organization-wide and employee
performance, promote employee retention, provide retirement security to
employees, or allow compensation expenses to vary with revenue on an
organization-wide basis. Moreover, the analysis and methods for
ensuring that incentive compensation arrangements take appropriate
account of risk should be tailored to the size, complexity, business
strategy, and risk tolerance of each organization. The resources
required will depend upon the complexity of the firm and its use of
incentive compensation arrangements. For some, the task of designing
and implementing compensation arrangements that properly offer
incentives for executive and non-executive employees to pursue the
organization's long-term well-being and that do not encourage imprudent
risk-taking is a complex task that will require the commitment of
adequate resources.
While issues related to designing and implementing incentive
compensation arrangements are complex, the Agencies are committed to
ensuring that banking organizations move forward in incorporating the
principles described in this guidance into their incentive compensation
practices.\5\
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\5\ In December 2009 the Federal Reserve, working with the other
Agencies, initiated a special horizontal review of incentive
compensation arrangements and related risk-management, control, and
corporate governance practices of large banking organizations
(LBOs). This initiative was designed to spur and monitor the
industry's progress towards the implementation of safe and sound
incentive compensation arrangements, identify emerging best
practices, and advance the state of practice more generally in the
industry.
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As discussed further below, because of the size and complexity of
their operations, LBOs \6\ should have and adhere to systematic and
formalized policies, procedures, and processes. These are considered
important in ensuring that incentive compensation arrangements for all
covered employees are identified and reviewed by appropriate levels of
management (including the board of directors where appropriate and
control units), and that they appropriately balance risks and rewards.
In several places, this guidance specifically highlights the types of
policies, procedures, and systems that LBOs should have and maintain,
but that generally are not expected of smaller, less complex
organizations. LBOs warrant the most intensive supervisory attention
because they are significant users of incentive compensation
arrangements and because flawed approaches at these organizations are
more likely to have adverse effects on the broader financial system.
The Agencies will work with LBOs as necessary through the supervisory
process to ensure that they promptly correct any deficiencies that may
be inconsistent with the safety and soundness of the organization.
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\6\ For supervisory purposes, the Agencies segment organizations
they supervise into different supervisory portfolios based on, among
other things, size, complexity, and risk profile. For purposes of
the final guidance, LBOs include, in the case of banking
organizations supervised by (i) the Federal Reserve, large, complex
banking organizations as identified by the Federal Reserve for
supervisory purposes; (ii) the OCC, the largest and most complex
national banks as defined in the Large Bank Supervision booklet of
the Comptroller's Handbook; (iii) the FDIC, large, complex insured
depository institutions (IDIs); and (iv) the OTS, the largest and
most complex savings associations and savings and loan holding
companies.
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The policies, procedures, and systems of smaller banking
organizations that use incentive compensation arrangements \7\ are
expected to be less extensive, formalized, and detailed than those of
LBOs. Supervisory reviews of incentive compensation arrangements at
smaller, less-complex banking organizations will be conducted by the
Agencies as part of the evaluation of those organizations' risk-
management, internal controls, and corporate governance during the
regular, risk-focused examination process. These reviews will be
tailored to reflect the scope and complexity of an organization's
activities, as well as the prevalence and scope of its incentive
compensation arrangements. Little, if any, additional examination work
is expected for smaller banking organizations that do not use, to a
significant extent, incentive compensation arrangements.\8\
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\7\ This guidance does not apply to banking organizations that
do not use incentive compensation.
\8\ To facilitate these reviews, where appropriate, a smaller
banking organization should review its compensation arrangements to
determine whether it uses incentive compensation arrangements to a
significant extent in its business operations. A smaller banking
organization will not be considered a significant user of incentive
compensation arrangements simply because the organization has a
firm-wide profit-sharing or bonus plan that is based on the bank's
profitability, even if the plan covers all or most of the
organization's employees.
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For all banking organizations, supervisory findings related to
incentive compensation will be communicated to the organization and
included in the relevant report of examination or inspection. In
addition, these findings will be incorporated, as appropriate, into the
organization's rating component(s) and subcomponent(s) relating to
risk-management, internal controls, and corporate governance under the
relevant supervisory rating system, as well as the organization's
overall supervisory rating.
An organization's appropriate Federal supervisor may take
enforcement action against a banking organization if its incentive
compensation arrangements or related risk-management, control, or
governance processes pose a risk to the safety and soundness of the
organization, particularly when the organization is not taking prompt
and effective measures to correct the deficiencies. For example, the
appropriate Federal supervisor may take an enforcement action if
material deficiencies are found to exist in the organization's
incentive compensation arrangements or related risk-management,
control, or governance processes, or the organization fails to promptly
develop, submit, or adhere to an effective plan designed to ensure that
its incentive compensation arrangements do not encourage imprudent
risk-taking and are consistent with principles of safety and soundness.
As provided under section 8 of the Federal Deposit Insurance Act (12
U.S.C. 1818), an enforcement action may, among other things, require an
organization to take affirmative action, such as developing a
corrective action plan that is acceptable to the appropriate Federal
supervisor to rectify safety-and-soundness deficiencies in its
incentive compensation arrangements or related processes. Where
warranted, the appropriate Federal supervisor may require the
organization to take additional affirmative action to correct or remedy
deficiencies related to the
[[Page 36407]]
organization's incentive compensation practices.
Effective and balanced incentive compensation practices are likely
to evolve significantly in the coming years, spurred by the efforts of
banking organizations, supervisors, and other stakeholders. The
Agencies will review and update this guidance as appropriate to
incorporate best practices that emerge from these efforts.
II. Scope of Application
The incentive compensation arrangements and related policies and
procedures of banking organizations should be consistent with
principles of safety and soundness.\9\ Incentive compensation
arrangements for executive officers as well as for non-executive
personnel who have the ability to expose a banking organization to
material amounts of risk may, if not properly structured, pose a threat
to the organization's safety and soundness. Accordingly, this guidance
applies to incentive compensation arrangements for:
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\9\ In the case of the U.S. operations of FBOs, the
organization's policies, including management, review, and approval
requirements for its U.S. operations, should be coordinated with the
FBO's group-wide policies developed in accordance with the rules of
the FBO's home country supervisor. The policies of the FBO's U.S.
operations should also be consistent with the FBO's overall
corporate and management structure, as well as its framework for
risk-management and internal controls. In addition, the policies for
the U.S. operations of FBOs should be consistent with this guidance.
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Senior executives and others who are responsible for
oversight of the organization's firm-wide activities or material
business lines; \10\
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\10\ Senior executives include, at a minimum, ``executive
officers'' within the meaning of the Federal Reserve's Regulation O
(see 12 CFR 215.2(e)(1)) and, for publicly traded companies, ``named
officers'' within the meaning of the Securities and Exchange
Commission's rules on disclosure of executive compensation (see 17
CFR 229.402(a)(3)). Savings associations should also refer to OTS's
rule on loans by saving associations to their executive officers,
directors, and principal shareholders. (12 CFR 563.43).
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Individual employees, including non-executive employees,
whose activities may expose the organization to material amounts of
risk (e.g., traders with large position limits relative to the
organization's overall risk tolerance); and
Groups of employees who are subject to the same or similar
incentive compensation arrangements and who, in the aggregate, may
expose the organization to material amounts of risk, even if no
individual employee is likely to expose the organization to material
risk (e.g., loan officers who, as a group, originate loans that account
for a material amount of the organization's credit risk).
For ease of reference, these executive and non-executive employees
are collectively referred to hereafter as ``covered employees'' or
``employees.'' Depending on the facts and circumstances of the
individual organization, the types of employees or categories of
employees that are outside the scope of this guidance because they do
not have the ability to expose the organization to material risks would
likely include, for example, tellers, bookkeepers, couriers, or data
processing personnel.
In determining whether an employee, or group of employees, may
expose a banking organization to material risk, the organization should
consider the full range of inherent risks arising from, or generated
by, the employee's activities, even if the organization uses risk-
management processes or controls to limit the risks such activities
ultimately may pose to the organization. Moreover, risks should be
considered to be material for purposes of this guidance if they are
material to the organization, or are material to a business line or
operating unit that is itself material to the organization.\11\ For
purposes of illustration, assume that a banking organization has a
structured-finance unit that is material to the organization. A group
of employees within that unit who originate structured-finance
transactions that may expose the unit to material risks should be
considered ``covered employees'' for purposes of this guidance even if
those transactions must be approved by an independent risk function
prior to consummation, or the organization uses other processes or
methods to limit the risk that such transactions may present to the
organization.
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\11\ Thus, risks may be material to an organization even if they
are not large enough to themselves threaten the solvency of the
organization.
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Strong and effective risk-management and internal control functions
are critical to the safety and soundness of banking organizations.
However, irrespective of the quality of these functions, poorly
designed or managed incentive compensation arrangements can themselves
be a source of risk to a banking organization. For example, incentive
compensation arrangements that provide employees strong incentives to
increase the organization's short-term revenues or profits, without
regard to the short- or long-term risk associated with such business,
can place substantial strain on the risk-management and internal
control functions of even well-managed organizations.
Moreover, poorly balanced incentive compensation arrangements can
encourage employees to take affirmative actions to weaken or circumvent
the organization's risk-management or internal control functions, such
as by providing inaccurate or incomplete information to these
functions, to boost the employee's personal compensation. Accordingly,
sound compensation practices are an integral part of strong risk-
management and internal control functions. A key goal of this guidance
is to encourage banking organizations to incorporate the risks related
to incentive compensation into their broader risk-management framework.
Risk-management procedures and risk controls that ordinarily limit
risk-taking do not obviate the need for incentive compensation
arrangements to properly balance risk-taking incentives.
III. Principles of a Sound Incentive Compensation System
Principle 1: Balanced Risk-Taking Incentives
Incentive compensation arrangements should balance risk and
financial results in a manner that does not encourage employees to
expose their organizations to imprudent risks.
Incentive compensation arrangements typically attempt to encourage
actions that result in greater revenue or profit for the organization.
However, short-run revenue or profit can often diverge sharply from
actual long-run profit because risk outcomes may become clear only over
time. Activities that carry higher risk typically yield higher short-
term revenue, and an employee who is given incentives to increase
short-term revenue or profit, without regard to risk, will naturally be
attracted to opportunities to expose the organization to more risk.
An incentive compensation arrangement is balanced when the amounts
paid to an employee appropriately take into account the risks
(including compliance risks), as well as the financial benefits, from
the employee's activities and the impact of those activities on the
organization's safety and soundness. As an example, under a balanced
incentive compensation arrangement, two employees who generate the same
amount of short-term revenue or profit for an organization should not
receive the same amount of incentive compensation if the risks taken by
the employees in generating that revenue or profit differ materially.
The employee whose activities create materially larger risks for the
organization should receive
[[Page 36408]]
less than the other employee, all else being equal.
The performance measures used in an incentive compensation
arrangement have an important effect on the incentives provided
employees and, thus, the potential for the arrangement to encourage
imprudent risk-taking. For example, if an employee's incentive
compensation payments are closely tied to short-term revenue or profit
of business generated by the employee, without any adjustments for the
risks associated with the business generated, the potential for the
arrangement to encourage imprudent risk-taking may be quite strong.
Similarly, traders who work with positions that close at year-end could
have an incentive to take large risks toward the end of a year if there
is no mechanism for factoring how such positions perform over a longer
period of time. The same result could ensue if the performance measures
themselves lack integrity or can be manipulated inappropriately by the
employees receiving incentive compensation.
On the other hand, if an employee's incentive compensation payments
are determined based on performance measures that are only distantly
linked to the employee's activities (e.g., for most employees,
organization-wide profit), the potential for the arrangement to
encourage the employee to take imprudent risks on behalf of the
organization may be weak. For this reason, plans that provide for
awards based solely on overall organization-wide performance are
unlikely to provide employees, other than senior executives and
individuals who have the ability to materially affect the
organization's overall risk profile, with unbalanced risk-taking
incentives.
Incentive compensation arrangements should not only be balanced in
design, they also should be implemented so that actual payments vary
based on risks or risk outcomes. If, for example, employees are paid
substantially all of their potential incentive compensation even when
risk or risk outcomes are materially worse than expected, employees
have less incentive to avoid activities with substantial risk.
Banking organizations should consider the full range of
risks associated with an employee's activities, as well as the time
horizon over which those risks may be realized, in assessing whether
incentive compensation arrangements are balanced.
The activities of employees may create a wide range of risks for a
banking organization, such as credit, market, liquidity, operational,
legal, compliance, and reputational risks, as well as other risks to
the viability or operation of the organization. Some of these risks may
be realized in the short term, while others may become apparent only
over the long term. For example, future revenues that are booked as
current income may not materialize, and short-term profit-and-loss
measures may not appropriately reflect differences in the risks
associated with the revenue derived from different activities (e.g.,
the higher credit or compliance risk associated with subprime loans
versus prime loans).\12\ In addition, some risks (or combinations of
risky strategies and positions) may have a low probability of being
realized, but would have highly adverse effects on the organization if
they were to be realized (``bad tail risks''). While shareholders may
have less incentive to guard against bad tail risks because of the
infrequency of their realization and the existence of the Federal
safety net, these risks warrant special attention for safety-and-
soundness reasons given the threat they pose to the organization's
solvency and the Federal safety net.
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\12\ Importantly, the time horizon over which a risk outcome may
be realized is not necessarily the same as the stated maturity of an
exposure. For example, the ongoing reinvestment of funds by a cash
management unit in commercial paper with a one-day maturity not only
exposes the organization to one-day credit risk, but also exposes
the organization to liquidity risk that may be realized only
infrequently.
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Banking organizations should consider the full range of current and
potential risks associated with the activities of covered employees,
including the cost and amount of capital and liquidity needed to
support those risks, in developing balanced incentive compensation
arrangements. Reliable quantitative measures of risk and risk outcomes
(``quantitative measures''), where available, may be particularly
useful in developing balanced compensation arrangements and in
assessing the extent to which arrangements are properly balanced.
However, reliable quantitative measures may not be available for all
types of risk or for all activities, and their utility for use in
compensation arrangements varies across business lines and employees.
The absence of reliable quantitative measures for certain types of
risks or outcomes does not mean that banking organizations should
ignore such risks or outcomes for purposes of assessing whether an
incentive compensation arrangement achieves balance. For example, while
reliable quantitative measures may not exist for many bad-tail risks,
it is important that such risks be considered given their potential
effect on safety and soundness. As in other risk-management areas,
banking organizations should rely on informed judgments, supported by
available data, to estimate risks and risk outcomes in the absence of
reliable quantitative risk measures.
Large banking organizations. In designing and modifying incentive
compensation arrangements, LBOs should assess in advance of
implementation whether such arrangements are likely to provide balanced
risk-taking incentives. Simulation analysis of incentive compensation
arrangements is one way of doing so. Such analysis uses forward-looking
projections of incentive compensation awards and payments based on a
range of performance levels, risk outcomes, and levels of risks taken.
This type of analysis, or other analysis that results in assessments of
likely effectiveness, can help an LBO assess whether incentive
compensation awards and payments to an employee are likely to be
reduced appropriately as the risks to the organization from the
employee's activities increase.
An unbalanced arrangement can be moved toward balance by
adding or modifying features that cause the amounts ultimately received
by employees to appropriately reflect risk and risk outcomes.
If an incentive compensation arrangement may encourage employees to
expose their banking organization to imprudent risks, the organization
should modify the arrangement as needed to ensure that it is consistent
with safety and soundness. Four methods are often used to make
compensation more sensitive to risk. These methods are:
[cir] Risk Adjustment of Awards: The amount of an incentive
compensation award for an employee is adjusted based on measures that
take into account the risk the employee's activities may pose to the
organization. Such measures may be quantitative, or the size of a risk
adjustment may be set judgmentally, subject to appropriate oversight.
[cir] Deferral of Payment: The actual payout of an award to an
employee is delayed significantly beyond the end of the performance
period, and the amounts paid are adjusted for actual losses or other
aspects of performance that are realized or become better known only
during the deferral period.\13\ Deferred payouts may be
[[Page 36409]]
altered according to risk outcomes either formulaically or
judgmentally, subject to appropriate oversight. To be most effective,
the deferral period should be sufficiently long to allow for the
realization of a substantial portion of the risks from employee
activities, and the measures of loss should be clearly explained to
employees and closely tied to their activities during the relevant
performance period.
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\13\ The deferral-of-payment method is sometimes referred to in
the industry as a ``clawback.'' The term ``clawback'' also may refer
specifically to an arrangement under which an employee must return
incentive compensation payments previously received by the employee
(and not just deferred) if certain risk outcomes occur. Section 304
of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7243), which applies to
chief executive officers and chief financial officers of public
banking organizations, is an example of this more specific type of
``clawback'' requirement.
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[cir] Longer Performance Periods: The time period covered by the
performance measures used in determining an employee's award is
extended (for example, from one year to two or more years). Longer
performance periods and deferral of payment are related in that both
methods allow awards or payments to be made after some or all risk
outcomes are realized or better known.
[cir] Reduced Sensitivity to Short-Term Performance: The banking
organization reduces the rate at which awards increase as an employee
achieves higher levels of the relevant performance measure(s). Rather
than offsetting risk-taking incentives associated with the use of
short-term performance measures, this method reduces the magnitude of
such incentives. This method also can include improving the quality and
reliability of performance measures in taking into account both short-
term and long-term risks, for example improving the reliability and
accuracy of estimates of revenues and long-term profits upon which
performance measures depend.\14\
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\14\ Performance targets may have a material effect on risk-
taking incentives. Such targets may offer employees greater rewards
for increments of performance that are above the target or may
provide that awards will be granted only if a target is met or
exceeded. Employees may be particularly motivated to take imprudent
risk in order to reach performance targets that are aggressive, but
potentially achievable.
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These methods for achieving balance are not exclusive, and
additional methods or variations may exist or be developed. Moreover,
each method has its own advantages and disadvantages. For example,
where reliable risk measures exist, risk adjustment of awards may be
more effective than deferral of payment in reducing incentives for
imprudent risk-taking. This is because risk adjustment potentially can
take account of the full range and time horizon of risks, rather than
just those risk outcomes that occur or become more evident during the
deferral period. On the other hand, deferral of payment may be more
effective than risk adjustment in mitigating incentives to take hard-
to-measure risks (such as the risks of new activities or products, or
certain risks such as reputational or operational risk that may be
difficult to measure with respect to particular activities), especially
if such risks are likely to be realized during the deferral period.
Accordingly, in some cases two or more methods may be needed in
combination for an incentive compensation arrangement to be balanced.
The greater the potential incentives an arrangement creates for an
employee to increase the risks associated with the employee's
activities, the stronger the effect should be of the methods applied to
achieve balance. Thus, for example, risk adjustments used to counteract
a materially unbalanced compensation arrangement should have a
similarly material impact on the incentive compensation paid under the
arrangement. Further, improvements in the quality and reliability of
performance measures themselves, for example improving the reliability
and accuracy of estimates of revenues and profits upon which
performance measures depend, can significantly improve the degree of
balance in risk-taking incentives.
Where judgment plays a significant role in the design or operation
of an incentive compensation arrangement, strong policies and
procedures, internal controls, and ex post monitoring of incentive
compensation payments relative to actual risk outcomes are particularly
important to help ensure that the arrangements as implemented are
balanced and do not encourage imprudent risk-taking. For example, if a
banking organization relies to a significant degree on the judgment of
one or more managers to ensure that the incentive compensation awards
to employees are appropriately risk-adjusted, the organization should
have policies and procedures that describe how managers are expected to
exercise that judgment to achieve balance and that provide for the
manager(s) to receive appropriate available information about the
employee's risk-taking activities to make informed judgments.
Large banking organizations. Methods and practices for making
compensation sensitive to risk are likely to evolve rapidly during the
next few years, driven in part by the efforts of supervisors and other
stakeholders. LBOs should actively monitor developments in the field
and should incorporate into their incentive compensation systems new or
emerging methods or practices that are likely to improve the
organization's long-term financial well-being and safety and soundness.
The manner in which a banking organization seeks to
achieve balanced incentive compensation arrangements should be tailored
to account for the differences between employees--including the
substantial differences between senior executives and other employees--
as well as between banking organizations.
Activities and risks may vary significantly both across banking
organizations and across employees within a particular banking
organization. For example, activities, risks, and incentive
compensation practices may differ materially among banking
organizations based on, among other things, the scope or complexity of
activities conducted and the business strategies pursued by the
organizations. These differences mean that methods for achieving
balanced compensation arrangements at one organization may not be
effective in restraining incentives to engage in imprudent risk-taking
at another organization. Each organization is responsible for ensuring
that its incentive compensation arrangements are consistent with the
safety and soundness of the organization.
Moreover, the risks associated with the activities of one group of
non-executive employees (e.g., loan originators) within a banking
organization may differ significantly from those of another group of
non-executive employees (e.g., spot foreign exchange traders) within
the organization. In addition, reliable quantitative measures of risk
and risk outcomes are unlikely to be available for a banking
organization as a whole, particularly a large, complex organization.
This factor can make it difficult for banking organizations to achieve
balanced compensation arrangements for senior executives who have
responsibility for managing risks on an organization-wide basis solely
through use of the risk-adjustment-of-award method.
Furthermore, the payment of deferred incentive compensation in
equity (such as restricted stock of the organization) or equity-based
instruments (such as options to acquire the organization's stock) may
be helpful in restraining the risk-taking incentives of senior
executives and other covered employees whose activities may have a
material effect on the overall financial performance of the
organization. However, equity-related deferred compensation may not be
as effective in restraining the incentives of lower-level covered
employees (particularly at large organizations) to take risks because
such
[[Page 36410]]
employees are unlikely to believe that their actions will materially
affect the organization's stock price.
Banking organizations should take account of these differences when
constructing balanced compensation arrangements. For most banking
organizations, the use of a single, formulaic approach to making
employee incentive compensation arrangements appropriately risk-
sensitive is likely to result in arrangements that are unbalanced at
least with respect to some employees.\15\
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\15\ For example, spreading payouts of incentive compensation
awards over a standard three-year period may not appropriately
reflect the differences in the type and time horizon of risk
associated with the activities of different groups of employees, and
may not be sufficient by itself to balance the compensation
arrangements of employees who may expose the organization to
substantial longer-term risks.
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Large banking organizations. Incentive compensation arrangements
for senior executives at LBOs are likely to be better balanced if they
involve deferral of a substantial portion of the executives' incentive
compensation over a multi-year period in a way that reduces the amount
received in the event of poor performance, substantial use of multi-
year performance periods, or both. Similarly, the compensation
arrangements for senior executives at LBOs are likely to be better
balanced if a significant portion of the incentive compensation of
these executives is paid in the form of equity-based instruments that
vest over multiple years, with the number of instruments ultimately
received dependent on the performance of the organization during the
deferral period.
The portion of the incentive compensation of other covered
employees that is deferred or paid in the form of equity-based
instruments should appropriately take into account the level, nature,
and duration of the risks that the employees' activities create for the
organization and the extent to which those activities may materially
affect the overall performance of the organization and its stock price.
Deferral of a substantial portion of an employee's incentive
compensation may not be workable for employees at lower pay scales
because of their more limited financial resources. This may require
increased reliance on other measures in the incentive compensation
arrangements for these employees to achieve balance.
Banking organizations should carefully consider the
potential for ``golden parachutes'' and the vesting arrangements for
deferred compensation to affect the risk-taking behavior of employees
while at the organizations.
Arrangements that provide for an employee (typically a senior
executive), upon departure from the organization or a change in control
of the organization, to receive large additional payments or the
accelerated payment of deferred amounts without regard to risk or risk
outcomes can provide the employee significant incentives to expose the
organization to undue risk. For example, an arrangement that provides
an employee with a guaranteed payout upon departure from an
organization, regardless of performance, may neutralize the effect of
any balancing features included in the arrangement to help prevent
imprudent risk-taking.
Banking organizations should carefully review any such existing or
proposed arrangements (sometimes called ``golden parachutes'') and the
potential impact of such arrangements on the organization's safety and
soundness. In appropriate circumstances an organization should consider
including balancing features--such as risk adjustment or deferral
requirements that extend past the employee's departure--in the
arrangements to mitigate the potential for the arrangements to
encourage imprudent risk-taking. In all cases, a banking organization
should ensure that the structure and terms of any golden parachute
arrangement entered into by the organization do not encourage imprudent
risk-taking in light of the other features of the employee's incentive
compensation arrangements.
Large banking organizations. Provisions that require a departing
employee to forfeit deferred incentive compensation payments may weaken
the effectiveness of the deferral arrangement if the departing employee
is able to negotiate a ``golden handshake'' arrangement with the new
employer.\16\ This weakening effect can be particularly significant for
senior executives or other skilled employees at LBOs whose services are
in high demand within the market.
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\16\ Golden handshakes are arrangements that compensate an
employee for some or all of the estimated, non-adjusted value of
deferred incentive compensation that would have been forfeited upon
departure from the employee's previous employment.
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Golden handshake arrangements present special issues for LBOs and
supervisors. For example, while a banking organization could adjust its
deferral arrangements so that departing employees will continue to
receive any accrued deferred compensation after departure (subject to
any clawback or malus \17\), these changes could reduce the employee's
incentive to remain at the organization and, thus, weaken an
organization's ability to retain qualified talent, which is an
important goal of compensation, and create conflicts of interest.
Moreover, actions of the hiring organization (which may or may not be a
supervised banking organization) ultimately may defeat these or other
risk-balancing aspects of a banking organization's deferral
arrangements. LBOs should monitor whether golden handshake arrangements
are materially weakening the organization's efforts to constrain the
risk-taking incentives of employees. The Agencies will continue to work
with banking organizations and others to develop appropriate methods
for addressing any effect that such arrangements may have on the safety
and soundness of banking organizations.
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\17\ A malus arrangement permits the employer to prevent vesting
of all or part of the amount of a deferred remuneration award. Malus
provisions are invoked when risk outcomes are worse than expected or
when the information upon which the award was based turns out to
have been incorrect. Loss of unvested compensation due to the
employee voluntarily leaving the firm is not an example of malus as
the term is used in this guidance.
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Banking organizations should effectively communicate to
employees the ways in which incentive compensation awards and payments
will be reduced as risks increase.
In order for the risk-sensitive provisions of incentive
compensation arrangements to affect employee risk-taking behavior, the
organization's employees need to understand that the amount of
incentive compensation that they may receive will vary based on the
risk associated with their activities. Accordingly, banking
organizations should ensure that employees covered by an incentive
compensation arrangement are informed about the key ways in which risks
are taken into account in determining the amount of incentive
compensation paid. Where feasible, an organization's communications
with employees should include examples of how incentive compensation
payments may be adjusted to reflect projected or actual risk outcomes.
An organization's communications should be tailored appropriately to
reflect the sophistication of the relevant audience(s).
Principle 2: Compatibility With Effective Controls and Risk-management
A banking organization's risk-management processes and internal
controls should reinforce and support the development and maintenance
of balanced incentive compensation arrangements.
[[Page 36411]]
In order to increase their own compensation, employees may seek to
evade the processes established by a banking organization to achieve
balanced compensation arrangements. Similarly, an employee covered by
an incentive compensation arrangement may seek to influence, in ways
designed to increase the employee's pay, the risk measures or other
information or judgments that are used to make the employee's pay
sensitive to risk.
Such actions may significantly weaken the effectiveness of an
organization's incentive compensation arrangements in restricting
imprudent risk-taking. These actions can have a particularly damaging
effect on the safety and soundness of the organization if they result
in the weakening of risk measures, information, or judgments that the
organization uses for other risk-management, internal control, or
financial purposes. In such cases, the employee's actions may weaken
not only the balance of the organization's incentive compensation
arrangements, but also the risk-management, internal controls, and
other functions that are supposed to act as a separate check on risk-
taking. For this reason, traditional risk-management controls alone do
not eliminate the need to identify employees who may expose the
organization to material risk, nor do they obviate the need for the
incentive compensation arrangements for these employees to be balanced.
Rather, a banking organization's risk-management processes and internal
controls should reinforce and support the development and maintenance
of balanced incentive compensation arrangements.
Banking organizations should have appropriate controls to
ensure that their processes for achieving balanced compensation
arrangements are followed and to maintain the integrity of their risk-
management and other functions.
To help prevent damage from occurring, a banking organization
should have strong controls governing its process for designing,
implementing, and monitoring incentive compensation arrangements.
Banking organizations should create and maintain sufficient
documentation to permit an audit of the effectiveness of the
organization's processes for establishing, modifying, and monitoring
incentive compensation arrangements. Smaller banking organizations
should incorporate reviews of these processes into their overall
framework for compliance monitoring (including internal audit).
Large banking organizations. LBOs should have and maintain policies
and procedures that (i) identify and describe the role(s) of the
personnel, business units, and control units authorized to be involved
in the design, implementation, and monitoring of incentive compensation
arrangements; (ii) identify the source of significant risk-related
inputs into these processes and establish appropriate controls
governing the development and approval of these inputs to help ensure
their integrity; and (iii) identify the individual(s) and control
unit(s) whose approval is necessary for the establishment of new
incentive compensation arrangements or modification of existing
arrangements.
An LBO also should conduct regular internal reviews to ensure that
its processes for achieving and maintaining balanced incentive
compensation arrangements are consistently followed. Such reviews
should be conducted by audit, compliance, or other personnel in a
manner consistent with the organization's overall framework for
compliance monitoring. An LBO's internal audit department also should
separately conduct regular audits of the organization's compliance with
its established policies and controls relating to incentive
compensation arrangements. The results should be reported to
appropriate levels of management and, where appropriate, the
organization's board of directors.
Appropriate personnel, including risk-management
personnel, should have input into the organization's processes for
designing incentive compensation arrangements and assessing their
effectiveness in restraining imprudent risk-taking.
Developing incentive compensation arrangements that provide
balanced risk-taking incentives and monitoring arrangements to ensure
they achieve balance over time requires an understanding of the risks
(including compliance risks) and potential risk outcomes associated
with the activities of the relevant employees. Accordingly, banking
organizations should have policies and procedures that ensure that
risk-management personnel have an appropriate role in the
organization's processes for designing incentive compensation
arrangements and for assessing their effectiveness in restraining
imprudent risk-taking.\18\ Ways that risk managers might assist in
achieving balanced compensation arrangements include, but are not
limited to, (i) reviewing the types of risks associated with the
activities of covered employees; (ii) approving the risk measures used
in risk adjustments and performance measures, as well as measures of
risk outcomes used in deferred-payout arrangements; and (iii) analyzing
risk-taking and risk outcomes relative to incentive compensation
payments.
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\18\ Involvement of risk-management personnel in the design and
monitoring of these arrangements also should help ensure that the
organization's risk-management functions can properly understand and
address the full range of risks facing the organization.
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Other functions within an organization, such as its control, human
resources, or finance functions, also play an important role in helping
ensure that incentive compensation arrangements are balanced. For
example, these functions may contribute to the design and review of
performance measures used in compensation arrangements or may supply
data used as part of these measures.
Compensation for employees in risk-management and control
functions should be sufficient to attract and retain qualified
personnel and should avoid conflicts of interest.
The risk-management and control personnel involved in the design,
oversight, and operation of incentive compensation arrangements should
have appropriate skills and experience needed to effectively fulfill
their roles. These skills and experiences should be sufficient to equip
the personnel to remain effective in the face of challenges by covered
employees seeking to increase their incentive compensation in ways that
are inconsistent with sound risk-management or internal controls. The
compensation arrangements for employees in risk-management and control
functions thus should be sufficient to attract and retain qualified
personnel with experience and expertise in these fields that is
appropriate in light of the size, activities, and complexity of the
organization.
In addition, to help preserve the independence of their
perspectives, the incentive compensation received by risk-management
and control personnel staff should not be based substantially on the
financial performance of the business units that they review. Rather,
the performance measures used in the incentive compensation
arrangements for these personnel should be based primarily on the
achievement of the objectives of their functions (e.g., adherence to
internal controls).
Banking organizations should monitor the performance of
their incentive compensation arrangements and should revise the
arrangements as needed if payments do not appropriately reflect risk.
Banking organizations should monitor incentive compensation awards
and payments, risks taken, and actual risk outcomes to determine
whether
[[Page 36412]]
incentive compensation payments to employees are reduced to reflect
adverse risk outcomes or high levels of risk taken. Results should be
reported to appropriate levels of management, including the board of
directors where warranted and consistent with Principle 3 below. The
monitoring methods and processes used by a banking organization should
be commensurate with the size and complexity of the organization, as
well as its use of incentive compensation. Thus, for example, a small,
noncomplex organization that uses incentive compensation only to a
limited extent may find that it can appropriately monitor its
arrangements through normal management processes.
A banking organization should take the results of such monitoring
into account in establishing or modifying incentive compensation
arrangements and in overseeing associated controls. If, over time,
incentive compensation paid by a banking organization does not
appropriately reflect risk outcomes, the organization should review and
revise its incentive compensation arrangements and related controls to
ensure that the arrangements, as designed and implemented, are balanced
and do not provide employees incentives to take imprudent risks.
Principle 3: Strong Corporate Governance
Banking organizations should have strong and effective corporate
governance to help ensure sound compensation practices, including
active and effective oversight by the board of directors.
Given the key role of senior executives in managing the overall
risk-taking activities of an organization, the board of directors of a
banking organization should directly approve the incentive compensation
arrangements for senior executives.\19\ The board also should approve
and document any material exceptions or adjustments to the incentive
compensation arrangements established for senior executives and should
carefully consider and monitor the effects of any approved exceptions
or adjustments on the balance of the arrangement, the risk-taking
incentives of the senior executive, and the safety and soundness of the
organization.
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\19\ As used in this guidance, the term ``board of directors''
is used to refer to the members of the board of directors who have
primary responsibility for overseeing the incentive compensation
system. Depending on the manner in which the board is organized, the
term may refer to the entire board of directors, a compensation
committee of the board, or another committee of the board that has
primary responsibility for overseeing the incentive compensation
system. In the case of FBOs, the term refers to the relevant
oversight body for the firm's U.S. operations, consistent with the
FBO's overall corporate and management structure.
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The board of directors of an organization also is ultimately
responsible for ensuring that the organization's incentive compensation
arrangements for all covered employees are appropriately balanced and
do not jeopardize the safety and soundness of the organization. The
involvement of the board of directors in oversight of the
organization's overall incentive compensation program should be scaled
appropriately to the scope and prevalence of the organization's
incentive compensation arrangements.
Large banking organizations and organizations that are significant
users of incentive compensation. The board of directors of an LBO or
other banking organization that uses incentive compensation to a
significant extent should actively oversee the development and
operation of the organization's incentive compensation policies,
systems, and related control processes. The board of directors of such
an organization should review and approve the overall goals and
purposes of the organization's incentive compensation system. In
addition, the board should provide clear direction to management to
ensure that the goals and policies it establishes are carried out in a
manner that achieves balance and is consistent with safety and
soundness.
The board of directors of such an organization also should ensure
that steps are taken so that the incentive compensation system--
including performance measures and targets--is designed and operated in
a manner that will achieve balance.
The board of directors should monitor the performance, and
regularly review the design and function, of incentive compensation
arrangements.
To allow for informed reviews, the board should receive data and
analysis from management or other sources that are sufficient to allow
the board to assess whether the overall design and performance of the
organization's incentive compensation arrangements are consistent with
the organization's safety and soundness. These reviews and reports
should be appropriately scoped to reflect the size and complexity of
the banking organization's activities and the prevalence and scope of
its incentive compensation arrangements.
The board of directors of a banking organization should closely
monitor incentive compensation payments to senior executives and the
sensitivity of those payments to risk outcomes. In addition, if the
compensation arrangement for a senior executive includes a clawback
provision, then the review should include sufficient information to
determine if the provision has been triggered and executed as planned.
The board of directors of a banking organization should seek to
stay abreast of significant emerging changes in compensation plan
mechanisms and incentives in the marketplace as well as developments in
academic research and regulatory advice regarding incentive
compensation policies. However, the board should recognize that
organizations, activities, and practices within the industry are not
identical. Incentive compensation arrangements at one organization may
not be suitable for use at another organization because of differences
in the risks, controls, structure, and management among organizations.
The board of directors of each organization is responsible for ensuring
that the incentive compensation arrangements for its organization do
not encourage employees to take risks that are beyond the
organization's ability to manage effectively, regardless of the
practices employed by other organizations.
Large banking organizations and organizations that are significant
users of incentive compensation. The board of an LBO or other
organization that uses incentive compensation to a significant extent
should receive and review, on an annual or more frequent basis, an
assessment by management, with appropriate input from risk-management
personnel, of the effectiveness of the design and operation of the
organization's incentive compensation system in providing risk-taking
incentives that are consistent with the organization's safety and
soundness. These reports should include an evaluation of whether or how
incentive compensation practices may increase the potential for
imprudent risk-taking.
The board of such an organization also should receive periodic
reports that review incentive compensation awards and payments relative
to risk outcomes on a backward-looking basis to determine whether the
organization's incentive compensation arrangements may be promoting
imprudent risk-taking. Boards of directors of these organizations also
should consider periodically obtaining and reviewing simulation
analysis of compensation on a forward-looking basis based on a range of
performance levels, risk outcomes, and the amount of risks taken.
[[Page 36413]]
The organization, composition, and resources of the board
of directors should permit effective oversight of incentive
compensation.
The board of directors of a banking organization should have, or
have access to, a level of expertise and experience in risk-management
and compensation practices in the financial services industry that is
appropriate for the nature, scope, and complexity of the organization's
activities. This level of expertise may be present collectively among
the members of the board, may come from formal training or from
experience in addressing these issues, including as a director, or may
be obtained through advice received from outside counsel, consultants,
or other experts with expertise in incentive compensation and risk-
management. The board of directors of an organization with less complex
and extensive incentive compensation arrangements may not find it
necessary or appropriate to require special board expertise or to
retain and use outside experts in this area.
In selecting and using outside parties, the board of directors
should give due attention to potential conflicts of interest arising
from other dealings of the parties with the organization or for other
reasons. The board also should exercise caution to avoid allowing
outside parties to obtain undue levels of influence. While the
retention and use of outside parties may be helpful, the board retains
ultimate responsibility for ensuring that the organization's incentive
compensation arrangements are consistent with safety and soundness.
Large banking organizations and organizations that are significant
users of incentive compensation. If a separate compensation committee
is not already in place or required by other authorities,\20\ the board
of directors of an LBO or other banking organization that uses
incentive compensation to a significant extent should consider
establishing such a committee--reporting to the full board--that has
primary responsibility for overseeing the organization's incentive
compensation systems. A compensation committee should be composed
solely or predominantly of non-executive directors. If the board does
not have such a compensation committee, the board should take other
steps to ensure that non-executive directors of the board are actively
involved in the oversight of incentive compensation systems. The
compensation committee should work closely with any board-level risk
and audit committees where the substance of their actions overlap.
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\20\ See, New York Stock Exchange Listed Company Manual Section
303A.05(a); Nasdaq Listing Rule 5605(d); Internal Revenue Code
section 162(m) (26 U.S.C. 162(m)).
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A banking organization's disclosure practices should
support safe and sound incentive compensation arrangements.
If a banking organization's incentive compensation arrangements
provide employees incentives to take risks that are beyond the
tolerance of the organization's shareholders, these risks are likely to
also present a risk to the safety and soundness of the
organization.\21\ To help promote safety and soundness, a banking
organization should provide an appropriate amount of information
concerning its incentive compensation arrangements for executive and
non-executive employees and related risk-management, control, and
governance processes to shareholders to allow them to monitor and,
where appropriate, take actions to restrain the potential for such
arrangements and processes to encourage employees to take imprudent
risks. Such disclosures should include information relevant to
employees other than senior executives. The scope and level of the
information disclosed by the organization should be tailored to the
nature and complexity of the organization and its incentive
compensation arrangements.\22\
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\21\ On the other hand, as noted previously, compensation
arrangements that are in the interests of the shareholders of a
banking organization are not necessarily consistent with safety and
soundness.
\22\ A banking organization also should comply with the
incentive compensation disclosure requirements of the Federal
securities law and other laws as applicable. See, e.g., Proxy
Disclosure Enhancements, SEC Release Nos. 33-9089, 34-61175, 74 FR
68334 (Dec. 23, 2009) (to be codified at 17 CFR pts. 229 and 249).
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Large banking organizations should follow a systematic
approach to developing a compensation system that has balanced
incentive compensation arrangements.
At banking organizations with large numbers of risk-taking
employees engaged in diverse activities, an ad hoc approach to
developing balanced arrangements is unlikely to be reliable. Thus, an
LBO should use a systematic approach--supported by robust and
formalized policies, procedures, and systems--to ensure that those
arrangements are appropriately balanced and consistent with safety and
soundness. Such an approach should provide for the organization
effectively to:
[cir] Identify employees who are eligible to receive incentive
compensation and whose activities may expose the organization to
material risks. These employees should include (i) senior executives
and others who are responsible for oversight of the organization's
firm-wide activities or material business lines; (ii) individual
employees, including non-executive employees, whose activities may
expose the organization to material amounts of risk; and (iii) groups
of employees who are subject to the same or similar incentive
compensation arrangements and who, in the aggregate, may expose the
organization to material amounts of risk;
[cir] Identify the types and time horizons of risks to the
organization from the activities of these employees;
[cir] Assess the potential for the performance measures included in
the incentive compensation arrangements for these employees to
encourage the employees to take imprudent risks;
[cir] Include balancing elements, such as risk adjustments or
deferral periods, within the incentive compensation arrangements for
these employees that are reasonably designed to ensure that the
arrangement will be balanced in light of the size, type, and time
horizon of the inherent risks of the employees' activities;
[cir] Communicate to the employees the ways in which their
incentive compensation awards or payments will be adjusted to reflect
the risks of their activities to the organization; and
[cir] Monitor incentive compensation awards, payments, risks taken,
and risk outcomes for these employees and modify the relevant
arrangements if payments made are not appropriately sensitive to risk
and risk outcomes.
III. Conclusion
Banking organizations are responsible for ensuring that their
incentive compensation arrangements do not encourage imprudent risk-
taking behavior and are consistent with the safety and soundness of the
organization. The Agencies expect banking organizations to take prompt
action to address deficiencies in their incentive compensation
arrangements or related risk-management, control, and governance
processes.
The Agencies intend to actively monitor the actions taken by
banking organizations in this area and will promote further advances in
designing and implementing balanced incentive compensation
arrangements. Where appropriate, the Agencies will take supervisory or
enforcement action to ensure that material deficiencies that pose a
threat to the safety and soundness of the organization are promptly
addressed. The Agencies also
[[Page 36414]]
will update this guidance as appropriate to incorporate best practices
as they develop over time.
This concludes the text of the Guidance on Sound Incentive
Compensation Policies.
Dated: June 17, 2010.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, June 21, 2010.
Robert deV. Frierson,
Deputy Secretary of the Board.
Dated: June 21, 2010.
Valerie J. Best,
Assistant Executive Secretary, Federal Deposit Insurance Corporation.
Dated: June 10, 2010.
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. 2010-15435 Filed 6-24-10; 8:45 am]
BILLING CODE 6210-01-P 4810-33-P 6714-01-P 6720-01-P