■■ ■ The 2010 Federal Banking Guidance outlines three key
principles to help ensure that incentive compensation policies
at banking organizations do not encourage imprudent risk-taking and are consistent with the safety and soundness of the
organization. The 2016 interagency proposal leverages these
1. Incentive compensation arrangements at a banking organization should provide employees incentives that appropriately
balance risk and financial results in a manner that does
not encourage employees to expose their organizations to
2. These arrangements should be compatible with effective
controls and risk-management; and
3. These arrangements should be supported by strong corporate
governance, including active and effective oversight by the
organization’s Board of Directors ( www.fdic.gov/news/news/
4. Interagency Guidelines Establishing Standards for Safety and
Soundness under Section 39 of the Federal Deposit Insurance
Act 1 (FDI Act), required each Federal banking agency to
establish three types of standards. One of the three types of
standards was to prohibit compensation that constitutes an
unsafe and unsound practice ( http://ithandbook.ffiec.gov/
media/resources/3529/occ_ 12_cfr_ 30_appendix_a.pdf, and
Compliance Management System (CMS)
for Mitigating Incentive-Driven Risk
The table on page 27 recaps the requisite CMS component outlined
in the Bureau's bulletin, the corresponding CMS objective and
examples of effective risk control measures.
Understand the Major Issues Being Cited
The agencies continue to cite issues related to compensation.
■ ■ ■ Sales goals that encourage employees, either directly or indirectly,
to open accounts or enroll consumers in services without their
knowledge or consent. Such practices can result in:
• Improperly incurred fees;
• Improper collections activities; and/or
• Negative effects on consumer credit scores.
■ ■ ■ Sales benchmarks that encourage employees or service providers to market a product deceptively to consumers who may not
benefit from or even qualify for it;
■ ■ ■ Paying compensation based on the terms or conditions of
transactions (such as interest rate) may encourage employees or
service providers to overcharge consumers, to place them in less
favorable products than they qualify for, or to sell them more
credit or services than they had requested or needed;
■ ■ ■ Paying more compensation for some types of transactions than
for others that were or could have been offered to meet consumer
needs, which could lead employees or service providers to steer
consumers to transactions not in their interests; and
■ ■ ■ Unrealistic quotas to sign consumers up for financial services
may incentivize employees to achieve this result without actual
consent or by means of deception.
In January 2017, the ABA released its ABA Sales Practices
and Incentive Compensation Risk Assessment Tool, which allows institutions to review their sales practice and incentive
compensation programs to identify potential exposures as well
as prepare for examiner inquiries ( www.aba.com/compliance/
Additionally, page 14 of the the March/April 2017 issue of ABA
Bank Compliance included Extreme UDAAP: A Cautionary Look
at Sales Practices. This article for financial institutions provides
guidelines and practical tips for monitoring sales practices.
It is noteworthy to mention that the increasing concern about
incentive compensation risk spans beyond the financial services industry. For example, organizations such as the Society of Corporate
Compliance and Ethics (SCCE) and the Health Care Compliance
Association (HCCA) published a survey in April 2017 on risk
management practices to manage incentive compensation risk.
The survey focus reflects the notion that the compliance function
is integral to promoting controls that discourage practices that
run awry of policies, procedures, or governing laws.
However, survey results suggest that in practice compliance
is often not involved in reviewing incentive compensation arrangements. 8 To respond to this gap, the report of survey results
references a March 2017 resource guide that outlines the elements
of a compliance program that incorporates measures to assess
incentive compensation programs and practices that are not too
dissimilar to that expected of banking institutions. 9
Assess Your Organization’s Risk.
Banking agencies report that some institutions are already aligning their risk management practices with the principles in the
2016 proposed Rule. Regulators observed such practices in part
through supervisory events such as horizontal reviews, 10 routine
examinations and other oversight activities. They also partially
attribute the action to the industry’s proactive work on incentive
compensation as well as expectations communicated over time
in supervisory guidance documents and regulatory proposals.
Banking agencies report that some
institutions are already aligning their risk
management practices with the principles
in the 2016 proposed Rule.