Pearl Meyer & Partners Client Alert

Federal Reserve Joins Forces with FDIC, OCC and OTS FDIC to Issue Final Guidance on Incentive Compensation Oversight and Risk

June 30, 2010

On June 21, 2010, the Federal Reserve Board joined with three other regulatory agencies to issue final rules governing the oversight of incentive compensation within the banking industry. Like the earlier proposal, the final rules are grounded in the general principles that incentive arrangements should balance risk and financial rewards; be compatible with effective controls and risk management; and be supported by strong corporate governance.

The final guidelines include significant refinements and clarifications to an earlier proposal, including:

• Expansion of applicability to all banking organizations supervised by any of the four government agencies
• Relief to smaller banking organizations that are not significant users of incentive compensation arrangements
• More specific procedural steps for risk review by large banking organizations
• Emphasis on tailored deferrals for senior executives
• No type or form of employee compensation exempted
• Confirmation that guidelines are principles-based, not formula-driven
• Risk controls not sufficient on a stand-alone basis
• No exemption for incentives deemed necessary for recruitment and retention
• No blanket prohibition on golden parachutes and handshakes
• Exemption for smaller organizations from some requirements related to board expertise or outside consultants
• Deference to oversight by foreign banking organizations