The Federal Reserve System wants all banking organizations – including bank holding companies – to stick with safe incentive compensation programs.
The proposed Fed compensation guidance, which appears today in the Federal Register, appears to apply to insurance companies that are also bank holding companies.
The Fed plans to conduct a “special horizontal review of incentive compensation practices at large complex banking organizations” and a review of compensation at other banking organizations that will be part of the “risk-focused examination process” for those organizations.
The Fed also wants to set principles for incentive compensation arrangements at all banking organizations.
In the proposed guidance, which is based on a draft posted on the Fed website Thursday, the Fed says bank incentive compensation arrangements should:
- Provide employees incentives that do not encourage excessive risk-taking beyond the organization’s ability to effectively identify and manage risk.
- Be compatible with effective controls and risk management.
- Be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.