Download:
pdf |
pdfmstockstill on DSKH9S0YB1PROD with NOTICES
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
an exemption under the Freedom of
Information Act (5 U.S.C. 552(b)(4) and
(b)(6)). The confidentiality status of the
information submitted will be judged on
a case-by-case basis.
Abstract: The information collected
assists the Federal Reserve, the Office of
the Comptroller of the Currency, the
Federal Deposit Insurance Corporation,
and the Office of Thrift Supervision in
fulfilling their statutory responsibilities
as supervisors. Each of these forms is
used to collect information in
connection with applications and
notices filed prior to proposed changes
in the ownership or management of
banking organizations. The agencies use
the information to evaluate the
controlling owners, senior officers, and
directors of the insured depository
institutions subject to their oversight.
4. Report title: Recordkeeping and
Disclosure Requirements Associated
with Regulation R.
Agency form number: FR 4025.
OMB control number: 7100–0316.
Frequency: On occasion.
Reporters: Commercial banks and
savings associations.
Estimated annual reporting hours:
Section 701, disclosures to customers—
12,500 hours; Section 701, disclosures
to brokers—375 hours; Section 723,
recordkeeping—188 hours; Section 741,
disclosures to customers—62,500 hours.
Estimated average hours per response:
Section 701, disclosures to customers—
5 minutes; Section 701, disclosures to
brokers—15 minutes; Section 723,
recordkeeping—15 minutes; Section
741, disclosures to customers—5
minutes.
Number of respondents: Section 701,
disclosures to customers—1,500;
Section 701, disclosures to brokers—
1,500; Section 723, recordkeeping—75;
Section 741, disclosures to customers—
750.
General description of report: This
information collection is required to
obtain a benefit pursuant to section
3(a)(4)(F) of the Securities Exchange Act
(15 U.S.C. 78c(a)(4)(F)) and may be
given confidential treatment under the
authority of the Freedom of Information
Act (5 U.S.C. 552(b)(4) and (b)(8)).
Abstract: Regulation R implements
certain exceptions for banks from the
definition of broker under Section
3(a)(4) of the Securities Exchange Act of
1934, as amended by the Gramm-LeachBliley Act. Sections 701, 723, and 741
of Regulation R contain information
collection requirements. Section 701
requires banks that wish to utilize the
exemption in that section to make
certain disclosures to the high net worth
customer or institutional customer. In
addition, section 701 requires banks that
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
wish to utilize the exemption in that
section to provide a notice to its brokerdealer partner regarding names and
other identifying information about
bank employees. Section 723 requires a
bank that chooses to rely on the
exemption in that section to exclude
certain trust or fiduciary accounts in
determining its compliance with the
chiefly compensated test in section 721
to maintain certain records relating to
the excluded accounts. Section 741
requires a bank relying on the
exemption provided by that section to
provide customers with a prospectus for
the money market fund securities, not
later than the time the customer
authorizes the bank to effect the
transaction in such securities, if the
class of series of securities are not noload.
Board of Governors of the Federal Reserve
System, June 22, 2010.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2010–15492 Filed 6–24–10; 8:45 am]
BILLING CODE 6210–01–P
FEDERAL RESERVE SYSTEM
Formations of, Acquisitions by, and
Mergers of Bank Holding Companies
The companies listed in this notice
have applied to the Board for approval,
pursuant to the Bank Holding Company
Act of 1956 (12 U.S.C. 1841 et seq.)
(BHC Act), Regulation Y (12 CFR Part
225), and all other applicable statutes
and regulations to become a bank
holding company and/or to acquire the
assets or the ownership of, control of, or
the power to vote shares of a bank or
bank holding company and all of the
banks and nonbanking companies
owned by the bank holding company,
including the companies listed below.
The applications listed below, as well
as other related filings required by the
Board, are available for immediate
inspection at the Federal Reserve Bank
indicated. The applications also will be
available for inspection at the offices of
the Board of Governors. Interested
persons may express their views in
writing on the standards enumerated in
the BHC Act (12 U.S.C. 1842(c)). If the
proposal also involves the acquisition of
a nonbanking company, the review also
includes whether the acquisition of the
nonbanking company complies with the
standards in section 4 of the BHC Act
(12 U.S.C. 1843). Unless otherwise
noted, nonbanking activities will be
conducted throughout the United States.
Additional information on all bank
holding companies may be obtained
PO 00000
Frm 00050
Fmt 4703
Sfmt 4703
36395
from the National Information Center
website at www.ffiec.gov/nic/.
Unless otherwise noted, comments
regarding each of these applications
must be received at the Reserve Bank
indicated or the offices of the Board of
Governors not later than July 22, 2010.
A. Federal Reserve Bank of Atlanta
(Clifford Stanford, Vice President) 1000
Peachtree Street, N.E., Atlanta, Georgia
30309:
1. USAmeriBancorp, Inc., Largo,
Florida; to acquire at least 50 percent of
the voting shares of Aliant Financial
Corporation, and thereby indirectly
acquire voting shares of Aliant Bank,
both of Alexander City, Alabama.
B. Federal Reserve Bank of
Minneapolis (Jacqueline G. King,
Community Affairs Officer) 90
Hennepin Avenue, Minneapolis,
Minnesota 55480–0291:
1. First Holding Company of Park
River, Inc., Park River, North Dakota; to
establish a wholly owned subsidiary,
Sheyenne Bancorp, Inc., Park River,
North Dakota, and thereby acquire 100
percent of the voting shares of First
Sharon Holding Company, Inc., Aneta,
North Dakota, and indirectly acquire
voting shares of First State Bank of
Sharon, Sharon, North Dakota. In
connection with this application,
Sheyenne Bancorp, Inc., has also
applied to become a bank holding
company.
Board of Governors of the Federal Reserve
System, June 22, 2010.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 2010–15474 Filed 6–24–10; 8:45 am]
BILLING CODE 6210–01–S
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
Office of the Comptroller of the
Currency, Treasury (OCC); Board of
Governors of the Federal Reserve
System, (Board or Federal Reserve);
AGENCY:
E:\FR\FM\25JNN1.SGM
25JNN1
36396
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
Federal Deposit Insurance Corporation
(FDIC); Office of Thrift Supervision,
Treasury (OTS).
ACTION: Final guidance.
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.
SUMMARY:
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:
DATES:
mstockstill on DSKH9S0YB1PROD with NOTICES
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.
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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
PO 00000
Frm 00051
Fmt 4703
Sfmt 4703
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—
• 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 nonexecutive 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
1 74
E:\FR\FM\25JNN1.SGM
FR 55227 (October 27, 2009).
25JNN1
mstockstill on DSKH9S0YB1PROD with NOTICES
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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.
The Board invited comment on all
aspects of the proposed guidance. The
Board also specifically requested
comments on a number of issues,
including whether:
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.
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
• 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,
PO 00000
Frm 00052
Fmt 4703
Sfmt 4703
36397
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-fitsall 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
E:\FR\FM\25JNN1.SGM
25JNN1
mstockstill on DSKH9S0YB1PROD with NOTICES
36398
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
‘‘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.
Several commenters also expressed
concern that the proposed guidance, if
implemented, could impede the ability
of banking organizations to attract or
3 On the other hand, one commenter requested
that the proposed guidance not be enforced
differently at larger institutions solely because of
their size.
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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 riskmanagement; 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
PO 00000
Frm 00053
Fmt 4703
Sfmt 4703
the safety and soundness of banking
organizations.4
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
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 riskmanagement 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.
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=080418
ShareholderReport.pdf.
E:\FR\FM\25JNN1.SGM
25JNN1
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
as the Financial Stability Board (FSB)
and the Senior Supervisors Group.6
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.
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
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.
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.
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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 principlesbased 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
PO 00000
Frm 00054
Fmt 4703
Sfmt 4703
36399
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 shortterm 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.
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
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.
E:\FR\FM\25JNN1.SGM
25JNN1
36400
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
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.
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.
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.
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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 riskmanagement procedures and control
functions that ordinarily limit risktaking do not obviate the need to
identify covered employees and to
develop incentive compensation
arrangements that properly balance risktaking 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 wellmanaged 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.
PO 00000
Frm 00055
Fmt 4703
Sfmt 4703
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.
E:\FR\FM\25JNN1.SGM
25JNN1
mstockstill on DSKH9S0YB1PROD with NOTICES
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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.
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 risktaking 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
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.’’
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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.
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 riskmanagement personnel, should have
input in the design and assessment of
incentive compensation arrangements.
Compensation for risk-management and
control personnel should be sufficient to
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.
PO 00000
Frm 00056
Fmt 4703
Sfmt 4703
36401
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
E:\FR\FM\25JNN1.SGM
25JNN1
mstockstill on DSKH9S0YB1PROD with NOTICES
36402
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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
Given the key role of senior
executives in managing the overall risktaking 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
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.
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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 riskmanagement 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 riskmanagement 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 riskmanagement 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
PO 00000
Frm 00057
Fmt 4703
Sfmt 4703
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
E:\FR\FM\25JNN1.SGM
25JNN1
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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
mstockstill on DSKH9S0YB1PROD with NOTICES
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
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
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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 riskrelated 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
substantially less extensive, formalized and detailed
than those of larger, more complex organizations.
PO 00000
Frm 00058
Fmt 4703
Sfmt 4703
36403
operation of the organization’s incentive
compensation system in providing risktaking 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 reevaluated.
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)
E:\FR\FM\25JNN1.SGM
25JNN1
36404
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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.
mstockstill on DSKH9S0YB1PROD with NOTICES
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
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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.
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.
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.
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
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.
PO 00000
Frm 00059
Fmt 4703
Sfmt 4703
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.
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://www.FDIC.gov/regulations/
laws/federal/propose.html.
• E-mail: [email protected].
• Mail: Gary Kuiper (202.898.3877),
Counsel, Federal Deposit Insurance
E:\FR\FM\25JNN1.SGM
25JNN1
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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.
mstockstill on DSKH9S0YB1PROD with NOTICES
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://
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 [email protected], 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
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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 longterm 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
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.
PO 00000
Frm 00060
Fmt 4703
Sfmt 4703
36405
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
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-andsoundness 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:
• 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
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.
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).
E:\FR\FM\25JNN1.SGM
25JNN1
36406
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
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 nonexecutive employees to pursue the
organization’s long-term well-being and
that do not encourage imprudent risktaking 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
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
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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.
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, riskfocused 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
practices, and advance the state of practice more
generally in the industry.
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.
7 This guidance does not apply to banking
organizations that do not use incentive
compensation.
PO 00000
Frm 00061
Fmt 4703
Sfmt 4703
any, additional examination work is
expected for smaller banking
organizations that do not use, to a
significant extent, incentive
compensation arrangements.8
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 riskmanagement, 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
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.
E:\FR\FM\25JNN1.SGM
25JNN1
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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.
mstockstill on DSKH9S0YB1PROD with NOTICES
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 nonexecutive 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:
• Senior executives and others who
are responsible for oversight of the
organization’s firm-wide activities or
material business lines; 10
• 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).
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.
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).
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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 structuredfinance 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.
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 riskmanagement and internal control
functions of even well-managed
organizations.
11 Thus, risks may be material to an organization
even if they are not large enough to themselves
threaten the solvency of the organization.
PO 00000
Frm 00062
Fmt 4703
Sfmt 4703
36407
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 riskmanagement framework. Riskmanagement 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
E:\FR\FM\25JNN1.SGM
25JNN1
mstockstill on DSKH9S0YB1PROD with NOTICES
36408
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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 yearend 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 organizationwide 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
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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-andloss 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.
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.
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 oneday 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.
PO 00000
Frm 00063
Fmt 4703
Sfmt 4703
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 forwardlooking 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:
Æ 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.
Æ 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
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
E:\FR\FM\25JNN1.SGM
25JNN1
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
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.
Æ 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.
Æ 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 risktaking 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
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
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.
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.
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
mitigating incentives to take hard-tomeasure 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 risktaking 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 riskadjusted, 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 risktaking 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
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
36409
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 nonexecutive employees (e.g., loan
originators) within a banking
organization may differ significantly
from those of another group of nonexecutive 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-ofaward 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
E:\FR\FM\25JNN1.SGM
25JNN1
36410
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
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
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
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.
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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.
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
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.
PO 00000
Frm 00065
Fmt 4703
Sfmt 4703
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.
• 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 risktaking 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 riskmanagement processes and internal
controls should reinforce and support
the development and maintenance of
balanced incentive compensation
arrangements.
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.
E:\FR\FM\25JNN1.SGM
25JNN1
mstockstill on DSKH9S0YB1PROD with NOTICES
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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 riskmanagement, 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
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
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
18 Involvement of risk-management personnel in
the design and monitoring of these arrangements
also should help ensure that the organization’s riskmanagement functions can properly understand
and address the full range of risks facing the
organization.
PO 00000
Frm 00066
Fmt 4703
Sfmt 4703
36411
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.
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 riskmanagement 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
E:\FR\FM\25JNN1.SGM
25JNN1
36412
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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.
mstockstill on DSKH9S0YB1PROD with NOTICES
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 risktaking 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
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.
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
adjustments on the balance of the
arrangement, the risk-taking incentives
of the senior executive, and the safety
and soundness of the organization.
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
PO 00000
Frm 00067
Fmt 4703
Sfmt 4703
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 riskmanagement personnel, of the
effectiveness of the design and
operation of the organization’s incentive
compensation system in providing risktaking 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 risktaking. 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.
E:\FR\FM\25JNN1.SGM
25JNN1
mstockstill on DSKH9S0YB1PROD with NOTICES
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
• 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
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)).
VerDate Mar<15>2010
16:23 Jun 24, 2010
Jkt 220001
incentive compensation systems. The
compensation committee should work
closely with any board-level risk and
audit committees where the substance
of their actions overlap.
• 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
• 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:
Æ Identify employees who are
eligible to receive incentive
compensation and whose activities may
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).
PO 00000
Frm 00068
Fmt 4703
Sfmt 4703
36413
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;
Æ Identify the types and time
horizons of risks to the organization
from the activities of these employees;
Æ Assess the potential for the
performance measures included in the
incentive compensation arrangements
for these employees to encourage the
employees to take imprudent risks;
Æ 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;
Æ 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
Æ 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
E:\FR\FM\25JNN1.SGM
25JNN1
36414
Federal Register / Vol. 75, No. 122 / Friday, June 25, 2010 / Notices
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.
BILLING CODE 6210–01–P 4810–33–P 6714–01–P 6720–
01–P
GENERAL SERVICES
ADMINISTRATION
Federal Travel Regulation (FTR);
Directions for Reporting Other Than
Coach-Class Accommodations for
Employees on Official Travel
Office of Governmentwide
Policy, General Services Administration
(GSA).
ACTION: Notice of GSA Bulletin FTR 10–
05.
AGENCY:
The General Services
Administration (GSA), in conjunction
with the Government Accountability
Office (GAO) report, Premium Class
Travel: Internal Control Weaknesses
Governmentwide Led to Improper and
Abusive Use of Premium Class Travel
(GAO–07–1268), has issued GSA
Bulletin FTR 10–05. This bulletin
provides directions to Federal Agencies
for reporting other than coach-class
accommodations for employees on
official travel. GSA Bulletin FTR 10–05
may be found at http://www.gsa.gov/
federaltravelregulation.
SUMMARY:
The provisions in this Bulletin
are effective June 9, 2010.
FOR FURTHER INFORMATION CONTACT: Mr.
Patrick O’Grady, Office of
Governmentwide Policy (M), Office of
Travel, Transportation, and Asset
Management (MT), General Services
Administration at (202) 208–4493 or via
e-mail at [email protected]. Please
cite GSA Bulletin FTR 10–05.
DATES:
mstockstill on DSKH9S0YB1PROD with NOTICES
BILLING CODE 6820–14–P
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Indian Health Service
American Indians Into Psychology;
Notice of Competitive Grant
Applications for American Indians Into
Psychology Program
Announcement Type: New.
Funding Opportunity Number: HHS–
IHS–2010–INPSY–0001.
CFDA Number: 93.970.
Application Deadline: July 23, 2010.
Review Date: July 29, 2010.
Earliest Anticipated Start Date:
September 1, 2010.
I. Funding Opportunity Description
[Docket 2010–009; Sequence 3]
16:23 Jun 24, 2010
[FR Doc. 2010–15433 Filed 6–24–10; 8:45 am]
Key Dates
[FR Doc. 2010–15435 Filed 6–24–10; 8:45 am]
VerDate Mar<15>2010
Dated: June 16, 2010.
Becky Rhodes,
Associate Administrator, Office of Travel,
Transportation, and Asset Management.
Jkt 220001
The Indian Health Service (IHS) is
accepting competitive grant applications
for the American Indians into
Psychology Program. This program is
authorized under the authority of ‘‘25
U.S.C. 1621p(a–d).’’, Indian Health Care
Improvement Act, Public Law 94–437,
as amended by Public Law 102–573 and
Public Law 111–148.
Purpose
The purpose of the Indians into
Psychology Program is to develop and
maintain Indian psychology career
recruitment programs as a means of
encouraging Indians to enter the
behavioral health field. This program is
described at 93.970 in the Catalog of
Federal Domestic Assistance. Costs will
be determined in accordance with
applicable Office of Management and
Budget Circulars. The Public Health
Service (PHS) is committed to achieving
the health promotion and disease
prevention objectives of Healthy People
2010, a PHS-led activity for setting
priority areas. This program
announcement is related to the priority
area of Educational and Communitybased programs. Potential applicants
may obtain a copy of Healthy People
2010, summary report in print, Stock
No. 017–001–00547–9, or via CD–ROM,
Stock No. 107–001–00549–5, through
the Superintendent of Documents,
Government Printing Office, P.O. Box
371954, Pittsburgh, PA 15250–7945,
(202) 512–1800. You may also access
this information via the Internet at the
PO 00000
Frm 00069
Fmt 4703
Sfmt 4703
following Web site: http://
www.health.gov/healthypeople.
The PHS strongly encourages all grant
and contract recipients to provide a
smoke-free workplace and promote the
non-use of all tobacco products. In
addition, Public Law 103–227, the ProChildren Act of 1994, prohibits smoking
in certain facilities (or in some cases,
any portion of the facility) in which
regular or routine education, library,
day care, health care, or early childhood
development services are provided to
children. This is consistent with the
PHS mission to protect and advance the
physical and mental health of the
American people.
II. Award Information
Type of Awards: Grant.
Estimated Funds Available: The total
amount identified for Fiscal Year 2010
is $757,386. The award is for 12 months
in duration and the average award is
approximately $252,462. Awards under
this announcement are subject to the
availability of funds. In the absence of
funding, the agency is under no
obligation to make awards funded under
this announcement.
Anticipated Number of Awards: An
estimated two awards will be made
under the program. If funding becomes
available, additional awards may be
made.
Project Period: 4 years.
Award Amount: $252,462, per year.
III. Eligibility Information
1. Eligible Applicants
Public and nonprofit private colleges
and universities that offer a Ph.D. in
clinical programs accredited by the
American Psychological Association
will be eligible to apply for a grant
under this announcement. However,
only one grant will be awarded and
funded to a college or university per
funding cycle.
2. Cost Sharing/Matching
This announcement does not require
matching funds or cost sharing.
3. Other Requirements
Required Affiliations—The grant
applicant must submit official
documentation indicating a Tribe’s
cooperation with and support of the
program within the schools on its
reservation and its willingness to have
a Tribal representative serving on the
program advisory board. Documentation
must be in the form prescribed by the
Tribe’s governing body, i.e., letter of
support or Tribal resolution.
Documentation must be submitted from
every Tribe involved in the grant
program. If application budgets exceed
E:\FR\FM\25JNN1.SGM
25JNN1
| File Type | application/pdf |
| File Title | Document |
| Subject | Extracted Pages |
| Author | U.S. Government Printing Office |
| File Modified | 2010-06-25 |
| File Created | 2010-06-24 |