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Practice Management > Compensation and Fees

Fed Unveils Pay Proposal

By Allison Bell

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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.

In the proposed guidance, “the term ‘banking organization’ includes U.S. bank holding companies,” the Fed says.

The Fed believes the principles and guidance are consistent with the Principles for Sound Compensation Practices adopted by the Financial Stability Board in April, and the FSB implementation standards that were issued in September, the Fed says.

The Fed asks for comments on suggestions that it should adopt “formulaic limits” for compensation at some, or all, banking organizations.

Some “have suggested consideration of an approach in which at least 60% of all incentive compensation received by senior executives of all large, complex banking organizations be deferred and at least 50% of incentive compensation be paid in the form of stock, options, or other equity-linked instruments,” Fed officials write in a preamble to the proposed guidance.

“Would such formulaic limits on determining and paying incentive compensation likely promote the long-term safety and soundness of banking organizations generally if applied to certain types or classes of executive or non-executive employees across all or certain types of banking organizations?” Fed officials ask.

Comments on the proposal are due Nov. 27.

A copy of the proposed guidance is available here.

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