FR4027_20151214_omb

Supporting Statement for the
Recordkeeping Requirements Associated with the
Guidance on Sound Incentive Compensation Policies
(FR 4027; OMB No. 7100-0327)
Summary
The Board of Governors of the Federal Reserve System, under delegated authority from
the Office of Management and Budget (OMB), proposes to extend, without revision, the
voluntary Recordkeeping Requirements Associated with the Guidance on Sound Incentive
Compensation Policies (the Guidance) (FR 4027; OMB No. 7100-0327). The guidance is based
on three key principles. These principles provide that incentive compensation arrangements at a
banking organization should 1) provide employees incentives that appropriately balance risk and
reward, 2) be compatible with effective controls and risk-management, and 3) be supported by
strong corporate governance, including active and effective oversight by the organization’s board
of directors. The Paperwork Reduction Act (PRA) classifies recordkeeping requirements contain
in agency guidance as an information collection.1
The Board identified certain aspects of the guidance (policies and procedures) that
constitute a collection of information. Under Principle 2 of the Guidance (Compatibility with
Effective Controls and Risk Management) a banking organization should establish strong
controls governing its process for designing, implementing, and monitoring incentive
compensation arrangements. Under Principle 3 of the Guidance (Strong Corporate Governance)
a banking organization’s board of directors should review and approve the overall goals and
purposes of the firm’s incentive compensation system. The board of directors should provide
clear direction to management to ensure that its policies and procedures are carried out in a
manner that achieves balance and is consistent with safety and soundness.
The Board’s annual burden is estimated to be 231,200 hours for the 5,710 banking
organizations that are likely to be subject to the Guidance.2 There are no required reporting
forms associated with the Guidance.
Background and Justification
Incentive compensation practices in the financial services industry were one of many
factors contributing to the financial crisis that began in 2007. Banking organizations too often
rewarded employees for increasing the firm’s short-term revenue or profit without adequate
recognition of the risks the employees’ activities posed for the firm. More importantly,
problematic compensation practices were not limited to the most senior executives at financial
firms. Compensation practices can encourage employees at various levels of a banking
organization, either individually or as a group, to undertake imprudent risks that can significantly
and adversely affect the risk profile of the firm.
1

44 U.S.C. § 3501 et seq.
As used in the guidance, the term “banking organization” includes U.S. bank holding companies, savings and loan
holding companies, state member banks, Edge Act and agreement corporations, and the U.S. operations of foreign
banks with a branch, agency, or commercial lending company subsidiary in the United States.
2

The Guidance was developed to help protect the safety and soundness of banking
organizations and promote the prompt improvement of incentive compensation practices
throughout the banking industry. In addition, the guidance is consistent with the Principles for
Sound Compensation Practices adopted by the Financial Stability Board (FSB) in April 2009, as
well as the Implementation Standards for those principles issued by the FSB in September 2009.
On June 25, 2010, the Federal Reserve published a joint3 final notice in the Federal
Register (75 FR 36395) implementing the recordkeeping provisions associated with the
Guidance, effective June 25, 2010.
Description of Information Collection
Compatibility with Effective Controls and Risk Management
Principle 2 of the Guidance states that a banking organization should have strong controls
governing its process for designing, implementing, and monitoring incentive compensation
arrangements. An organization’s policies and procedures should:
 identify and describe 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;
 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
 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. Banking organizations also should create and maintain sufficient
documentation to permit an audit of the organization’s processes for establishing,
modifying, and monitoring incentive compensation arrangements.
The Guidance also states that a banking organization 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 organization’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.

3

The proposed guidance was developed initially by the Federal Reserve; however, it was subsequently finalized
jointly with the Office of the Comptroller of the Currency (OCC) (Guidance on Sound Incentive Compensation
Practices (OMB No. 1557-0245)), the Federal Deposit Insurance Corporation (FDIC) (Interagency Guidance on
Sound Incentive Compensation Practices (OMB No. 3064-0175)), and the Office of Thrift Supervision (OTS) (the
agencies). Note: As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the OTS was
abolished and its functions and powers were transferred to the OCC, FDIC, and the Federal Reserve.

2

Strong Corporate Governance
Principle 3 of the Guidance states that the board of directors should review and approve
the overall goals and purposes of the firm’s incentive compensation system. The board of
directors should provide clear direction to management to ensure that its policies and procedures
are carried out in a manner that achieves balance and is consistent with safety and soundness.
The board of directors 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 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 should receive and review, on an annual or more frequent basis, an
assessment by management, with appropriate input from risk management personnel, of the
effectiveness of the design and operation of the organization’s incentive compensation system in
providing risk taking 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 be encouraging excessive risk taking. 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. In addition, at banking
organizations that are significant users of incentive compensation arrangements, the board 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 excessive risk-taking.
Respondent Panel
The 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 Act and agreement corporations.
Time Schedule for Information Collection
The recordkeeping requirements are documented on occasion. Bank examiners would
verify compliance with this recordkeeping requirement during examinations. The documentation
required by the Guidance is maintained by each institution; therefore, are not collected or
published by the Federal Reserve System.
Legal Status
The Board’s Legal Division has determined that this information collection is authorized
pursuant to sections 9, 11(a), 11(i), 25, and 25A of the Federal Reserve Act (12 U.S.C. §§
248(a), 248(i), 324, 602, and 625), section 5 of the Bank Holding Company Act (12 U.S.C. §

3

1844), section 7(c) of the International Banking Act (12 U.S.C. § 3105(c)), and section 10(b)(2)
of the Home Owners’ Loan Act (12 U.S.C. § 1467a(b)(2)). Because the recordkeeping
requirements are contained within guidance (and not a statute or regulation) they are voluntary.
Because the records will be maintained by each banking institution, the Freedom of
Information Act (FOIA) would only be implicated if the Board’s examiners retained a copy of
the records as part of an examination or supervision of the banking institution. To the extent the
Board collects this information during the course of an examination or supervision of a banking
institution, the information is considered confidential under exemption 8 of the FOIA (5 U.S.C. §
552(b)(8)). In addition, the information may also be kept confidential under exemption 4 of the
FOIA which protects commercial or financial information obtained from a person that is
privileged or confidential (5 U.S.C. § 552(b)(4)).
Consultation Outside the Agency
On June 23, 2015, the Federal Reserve published a notice in the Federal Register
(80 FR 35953) requesting public comment for 60 days on the extension, without revision, of the
FR 4027. The comment period for this notice expired on August 24, 2015. The Federal Reserve
did not receive any comments. On September 11, 2015, the Federal Reserve published a final
notice in the Federal Register (80 FR 54790) for the FR 4027.
Estimate of Respondent Burden
The Federal Reserve estimates that 5 large respondents would take, on average, 480
hours (two months) to modify policies and procedures to monitor incentive compensation. The
Federal Reserve estimates that 5 small respondents would take, on average, 80 hours (two
business weeks) to establish or modify policies and procedures to monitor incentive
compensation. The total one-time burden is estimated to be 2,800 hours. In addition, the Federal
Reserve 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 burden to be 228,400 hours. The total annual burden for
the FR 4027 represents 1.75 percent of total Federal Reserve System paperwork burden.
Annual
frequency

Estimated
average hours
per response

5
5

1
1

480
80

2,400
400

5,710

1

40

228,400

Number of
respondents4

FR 4027
One-time Implementation
Large institutions
Small institutions
Ongoing maintenance
Total

Estimated
annual burden
hours

231,200

4

Of these respondents, 5,058 are estimated to be small entities as defined by the Small Business Administration
(i.e., entities with less than $550 million in total assets) www.sba.gov/content/table-small-business-size-standards.

4

The estimated cost to the public for this information collection is $11,964,600.5
Sensitive Questions
This collection of information contains no questions of a sensitive nature, as defined by
OMB guidelines.
Estimate of Cost to the Federal Reserve System
Since records are maintained at the banking organization, the cost to the Federal Reserve
System is negligible.

5

Total cost to the public was estimated using the following formula: percent of staff time, multiplied by annual
burden hours, multiplied by hourly rates (30% Office & Administrative Support at $17, 45% Financial Managers at
$63, 15% Lawyers at $64, and 10% Chief Executives at $87). Hourly rates for each occupational group are the
(rounded) mean hourly wages from the Bureau of Labor and Statistics (BLS), Occupational Employment and Wages
May 2014, published March 25, 2015, www.bls.gov/news.release/ocwage.nr0.htm. Occupations are defined using
the BLS Occupational Classification System, www.bls.gov/soc/.

5