Boardman Law Firm LLP—Banking Group

Banking Regulators Issue Final Guidance on Incentive Compensation

On June 10, 2010, the Federal Reserve, OCC, OTS and FDIC issued final guidance designed to ensure that incentive compensation arrangements at banks take into account risk and are consistent with safe and sound practices. The guidance focuses on making sure that incentive compensation arrangements at banks appropriately tie rewards to longer-term performance and do not undermine the safety and soundness of the bank or threaten the broader economy. The guidance applies not only to executive officers, but also to other employees who have the ability to materially affect the risk profile of a bank, either individually or as part of a group.

These safety and soundness principles that all banks must now take into account when establishing incentive compensation arrangements are:

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 banks 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 bank’s board of directors.

The regulatory agencies intend to actively monitor the actions being taken by banks with respect to incentive compensation arrangements and will review and update the guidance as appropriate to incorporate best practices that emerge. The complete guidance can be found at http://www.fdic.gov/news/news/press/2010/pr10138a.pdf.