FR4027 Incentive Compensation FINAL Guidance P.R.

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Joint Press Release
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency
Office of Thrift Supervision

For immediate release

June 21, 2010

Federal Reserve, OCC, OTS, FDIC Issue Final Guidance on Incentive
Compensation
The Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Office of Thrift
Supervision (OTS), and the Federal Deposit Insurance Corporation (FDIC) issued final guidance
today to ensure that incentive compensation arrangements at financial organizations take into
account risk and are consistent with safe and sound practices. The guidance was originally proposed
by the Federal Reserve last year. The OCC, OTS, and FDIC are joining in issuing the final version.
The Federal Reserve, in cooperation with the other banking agencies, has completed a first round of
in-depth analysis of incentive compensation practices at large, complex banking organizations as
part of a so-called horizontal review, a coordinated examination of practices across multiple firms.
Last month, the Federal Reserve delivered assessments to the firms that included analysis of current
compensation practices and areas requiring prompt attention. Firms are submitting plans to the
Federal Reserve outlining steps and timelines for addressing outstanding issues to ensure that
incentive compensation plans do not encourage excessive risk-taking.
"Many large banking organizations have already implemented some changes in their incentive
compensation policies, but more work clearly needs to be done," Federal Reserve Governor Daniel
K. Tarullo said. "The Federal Reserve expects firms to make material progress this year on the
matters identified as we work toward the ultimate goal of ensuring that incentive compensation
programs are risk appropriate and are supported by strong corporate governance."
During the next stage, the banking agencies will be conducting additional cross-firm, horizontal
reviews of incentive compensation practices at the large, complex banking organizations for
employees in certain business lines, such as mortgage originators. The agencies will also be
following up on specific areas that were found to be deficient at many firms, such as:
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Many firms need better ways to identify which employees, either individually or as a group,
can expose banking organizations to material risk;
While many firms are using or are considering various methods to make incentive
compensation more risk sensitive, many are not fully capturing the risks involved and are not
applying such methods to enough employees;
Many firms are using deferral arrangements to adjust for risk, but they are taking a "one-sizefits-all" approach and are not tailoring these deferral arrangements according to the type or
duration of risk; and
Many firms do not have adequate mechanisms to evaluate whether established practices are
successful in balancing risk.

In addition to the work with the large, complex banking organizations, the agencies are also working
to incorporate oversight of incentive compensation arrangements into the regular examination
process for smaller firms. These reviews are being tailored to take account of the size, complexity,

http://www.federalreserve.gov/newsevents/press/bcreg/20100621a.htm

6/22/2010

Printer Version - Board of Governors of the Federal Reserve System

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and other characteristics of these banking organizations.
The guidance is designed to ensure that incentive compensation arrangements at banking
organizations appropriately tie rewards to longer-term performance and do not undermine the safety
and soundness of the firm or create undue risks to the financial system. Because improperly
structured compensation arrangements for both executive and non-executive employees may pose
safety and soundness risks, the guidance applies not only to top-level managers, but also to other
employees who have the ability to materially affect the risk profile of an organization, either
individually or as part of a group.
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.
The guidance will become effective when published in the Federal Register, which is expected
shortly.
Attachment (212 KB PDF)
Media Contacts:
Federal Reserve

Barbara Hagenbaugh

202-452-2955

FDIC

Andrew Gray

202-898-6993

OCC

Dean DeBuck

202-874-5770

OTS

William Ruberry

202-906-6677

http://www.federalreserve.gov/newsevents/press/bcreg/20100621a.htm

6/22/2010