REGULATORS INCREASINGLY WARN BANKS that incentive compensation practices can materially elevate a bank’s risk and pose harm to consumers. On the flip side, through the 2010 Interagency Guidance on Sound Incentive Compensation Policies, the federal banking agencies1 stated: “These arrangements serve several important and worthy
objectives, including attracting skilled staff, promoting better organization-wide and employee
performance, promoting employee retention, providing retirement security to employees, and
allowing an organization’s personnel costs to vary along with revenues.”
So What is the Disconnect between the
Positive View of Incentive Compensation
and the Expressed Concern?
Regulators are reacting to the “dark side” of incentive compensation
that has adversely impacted financial institutions and consumers.
For example, 18 (or 28%) of the 65 institutions with total assets of
$1 billion or more that failed between 2007 and 2015, had issues
or concerns related to compensation arrangements. Many of the
issues pertained to incentive-based compensation. 2
In addition, the Consumer Financial Protection Bureau (
Bureau) issued a bulletin in November 2016 indicating that it had
amassed a considerable number of cases involving incentive driven
acts or practices adversely impacting consumers. The problems
■ ■ ■ Credit Card Add-On Matters: Twelve cases involving improper practices to market credit card add-on products or to
retain customers once enrolled including cases in which employees
or service providers received incentives. For example, tapes of
sales calls showed that employees and service providers deviated
from prepared call scripts to market the add-on products more
aggressively, and often deceptively, to sign up more customers.
■ ■ ■ Overdraft Opt-in Matters: In at least one case, customers were
deceived into opting-in to overdraft services. Incented for hitting
specific targets, a bank’s telemarketing service provider deceptively
marketed overdraft services and enrolled certain bank customers
in those services without their consent.
■ ■ ■ Unfair and Abusive Sales Practices: In these cases, employees:
• Opened deposit and credit card accounts without customer
authorization to satisfy sales goals and earn financial rewards
under the bank’s incentives;
• Engaged in “simulated funding” by opening the deposit accounts without consumers’ knowledge or consent, and as a
result, customers also incurred improper fees.
• Issued unauthorized credit cards, thus improperly charging fees;
• Opened debit cards and created PINs to activate them without
customers’ knowledge or consent; and
• Enrolled consumers in online banking services using false
email addresses, thereby also impacting customer credit scores.
For the cases involving the 18 failed banking institutions, there
were common risk drivers. The agencies noted that the compensation issues largely related either to excessive compensation or
tying financial incentives to metrics (such as corporate performance or loan production), without adequate consideration of
related risks. Several cases involved poor governance practices,
most commonly, dominant management influencing improper
incentives. For institutions where the Consumer Financial Protection Bureau (Bureau) noted issues, gaps were typically evident
in compliance monitoring, vendor management, and quality assurance programs that failed to prevent, identify, or correct the
practices in a timely manner.
Has the Current Environment of Regulatory
Uncertainty Mitigated the Concern
Regarding Incentive Compensation?
Despite some uncertainty regarding current bank regulation and
the supervisory agenda, the risk associated with incentive compensation remains on the regulators’ radar. Some indicators at
the federal and state levels include the following:
Consumer Financial Protection Bureau:
While there has been a recent change in leadership at the Bureau, its statutory mandate remains unchanged: helping to ensure consumers can make responsible decisions about financial
transactions and are protected from unfair, deceptive, or abusive
acts and practices. In fact, in the Bureau’s January 2018 call for
public comment on ways to fulfill its statutory obligations, the
request for feedback notes an obligation of “vigorously enforcing
consumer financial law”.
To the extent, incentive-compensation sales practices promote
consumer harm, the risk remains a supervisory priority. For example, in its October 2016 Student Loan Ombudsman’s Annual
Report3 the Bureau noted that debt collectors involved in the federal
loan rehabilitation program for student loans, are paid as much
as $40 for every dollar they collect from struggling borrowers,
even if borrowers wind up back in default. Moreover, consumer