Federal Reserve Releases Proposed Incentive Compensation Guidelines for Banking Organizations

On October 22, 2009, the Board of Governors of the Federal Reserve System (Federal Reserve) released proposed incentive compensation guidelines that would apply to all banking organizations under the Federal Reserve’s supervision. These guidelines aim to ensure that banking organizations’ compensation policies and practices do not encourage excessive risk-taking and undermine the soundness of the banking organization.

The Federal Reserve’s guidelines contain two separate supervisory proposals. First, the Federal Reserve would review the compensation policies and practices of 28 large, complex banking organizations to determine whether these policies and practices meet the guidelines’ principles for risk-appropriate incentive compensation. Second, the Federal Reserve would review compensation practices at regional, community and other banking organizations as part of the regular, risk-focused examination process of these banking organizations. The proposed compensation reviews would focus on the compensation of senior executives and other control persons, and individual employees and groups of employees who may expose the banking organization to significant levels of risk.

During the proposed compensation reviews, the Federal Reserve would evaluate each banking organization's compensation practices in light of the following principles of sound incentive compensation systems: (1) incentive compensation arrangements should balance risk and financial results in a way that does not provide incentives for excessive risk-taking; (2) a banking organization’s risk-management process should reinforce and support balanced incentive compensation arrangements; and (3) banking organizations should have strong corporate governance to promote sound compensation practices.