Bankin’ Bits

Final Guidance on Incentive Compensation Includes Small Banks

June 23, 2010 at 9:13 pm Scott Smalley Leave a comment

               On June 21, the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and Office of Thrift Supervision (the “Agencies”) issued final Guidance on Sound Incentive Compensation Policies.  The guidance is designed to help ensure that incentive compensation policies at banking organizations do not encourage imprudent risk-taking and are consistent with safety and soundness.

Application to Smaller Banking Organizations

            Although the proposed guidance only applied to banking organizations supervised by the Federal Reserve, the final guidance applies to all banking organizations supervised by the Agencies.  However, the final guidance is expected to have less impact on smaller banking organizations, which, unlike their larger counterparts, may not need to implement systematic and formalized policies, procedures and processes.  Whether or not an organization is considered “large” is determined under the relevant agency’s standard.  The guidance permits flexibility for customized arrangements.

Scope

            The guidance applies to senior executives and other employees who, either individually or as part of a group, have the ability to expose the baking organization to material amounts of risk.  “Senior executives” includes, at a minimum, “executive officers” within the meaning of Federal Reserve Regulation O (12 C.F.R. § 215.2(e)(1)) and, for publically traded companies, “named officers” within the meaning of the Securities and Exchange Commission’s rules on the disclosure of executive compensation (17 C.F.R. § 229.402(a)(3)).

Key Principles

            The final guidance embodies the same three key principals as the proposed guidance:

1. Incentive compensation arrangements 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;
3. These arrangements should be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

More Information

            The final guidance will be effective on the date of its publication in the Federal Register.  A complete copy of the final guidance can be found here.

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