Publications

On October 22, 2009, the U.S. Board of Governors of the Federal Reserve System issued Proposed Guidance on Sound Incentive Compensation Policies.  This proposed guidance is intended to ensure that banking organizations’ incentive compensation arrangements do not undermine the safety and soundness of such organizations.  The guidance identifies three principles of safety and soundness of incentive compensation arrangements, and related policies and procedures, for banking organizations: (1) balanced risk-taking initiatives; (2) compatibility with effective controls and risk management; and (3) strong corporate governance.  The guidance also announced that the Federal Reserve is immediately undertaking two supervisory initiatives--a horizontal review of incentive compensation practices at 28 large complex banking organizations and a review of incentive compensation practices at all other banking organizations as part of the risk-focused examination process for these organizations.  These initiatives are intended to identify unsafe compensation practices at banking organizations and to move such organizations towards risk-management systems, controls or other practices that will assist in implementing safe and sound compensation practices.

The Federal Reserve has invited public comment on the proposed guidance, and the initiatives, which comments are due by November 27, 2009.  However, the Federal Reserve expects all banking organizations to immediately begin evaluating their incentive compensation arrangements and related risk management, control and corporate processes and addressing deficiencies in these arrangements or processes that are inconsistent with the banking organization’s safety and soundness.