At a minimum, the Rule’s general requirements for all covered
institutions provide for:
■ ■ ■ Incentive-compensation arrangements that adhere to three
1. A balance between risk and reward;
2. Effective risk management and controls; and
3. Effective governance.
■ ■ ■ Effective Governance led by the Board of Directors (or a designated compensation committee) responsible for approval and
• Incentive compensation program that governs arrangements
offered by the institution;
• Incentive-based compensation arrangements for senior executive officers, including the amount of awards and, at the time
of vesting, payouts under such arrangements; and
•Material exceptions or adjustments to incentive-based
compensation policies or arrangements for senior executive officers.
■ ■ ■ Processes to ensure recordkeeping and disclosure in the event
of a request from the institution’s primary regulator including:
• Creating annual records standards, maintained for at least
seven years that ( 1) document the structure of incentive-based compensation arrangements and that ( 2) demonstrate
compliance with the rule (such as the written assessment by
management to identify performance weaknesses and require
appropriate corrective action).
■ ■ Maintaining, at a minimum:
Copies of all incentive compensation plans;
A record of who is subject to each plan; and
A description of how the incentive compensation
program aligns with effective risk management and
■ ■ ■ Incentivizing can be safe as well as effective. Banking organizations welcome organic growth. As such the concept of “selling” is
increasingly becoming a norm regardless of an institution’s asset
size. In fact, competition with a growing number and diverse array
of market participants may render incentive-compensation an
evergreen tool critical to goal attainment. Regulators acknowledge
the merits of this strategy; however, their current overarching
priority is to ensure such tools include controls to mitigate harm
to the institution and its customers.
■ ■ ■ “Curb the Enthusiasm” of just meeting the goal with disregard for the process. Standards in supervisory guidance as well
as the 2016 proposed Rule, such as “appropriately balance risk
and reward,” should become part of an institution’s culture and
drive the development of risk controls. Such controls should as
a routine, provide for disincentive for “bad behavior” as well as
rewards for goal attainment.
■ ■ ■ Regardless of current regulatory uncertainty, supervisory
risk management expectations concerning incentive-driven
practices are heightened and focused. Messages from the agencies underscore substantive risk management expectations aimed
at mitigating the dark side of incentive-driven banking practices.
In that regard, feedback from agencies indicate field procedures
will be aimed at assessing programs controlling risk within the
institution as well as the activities of third party service providers. ■
ABOUT THE AUTHOR
BONITA G. JONES, President of San Francisco-based Bonita Jones &
Associates, LLC, is a retired principal in the Banking Supervision and
Regulation Division of the Federal Reserve Bank of San Francisco.
She can be reached at firstname.lastname@example.org or (415) 297-1784.
1 Office of the Comptroller of the Currency, Treasury (OCC); Board of
Governors of the Federal Reserve System, (Board or Federal Reserve);
Federal Deposit Insurance Corporation (FDIC); Office of Thrift
Supervision, Treasury (OTS).
3 http://www.consumerfinance.gov/about-us/ne wsroom/cfpb-projects-one-three-rehabilitated-student-loan-borrowers-will-re-default-within-two-years/
5 The April 14, 2011 interagency group included the OCC, FRB, FDIC, OTS,
NCUA, SEC, and the Federal Housing Finance Agency. The member of the
group responsible for re-issuing the proposal on June 10, 2016 essentially
remained the same except for the OTS which was merged into the OCC.
6 Organizations covered by the rule are regulated institution with average
total consolidated assets greater than or equal to $1 billion. Covered
institutions are tiered by asset size as follows: Level 1-a covered institution
with average total consolidated assets greater than or equal to $250 billion
and any subsidiary of a Level 1 covered institution that would itself be
a covered institution; Level 2-a covered institution with average total
consolidated assets greater than or equal to $50 billion that is not a Level 1
covered institution and any subsidiary of a Level 2 covered institution that
would itself be a covered institution; Level 3- a covered institution with
average total consolidated assets greater than or equal to $1 billion that is
not a Level 1 covered institution or Level 2 covered institution.
9 “Measuring Compliance Program Effectiveness: A Resource Guide”, released
by the Office of Inspector General at Health and Human Services and from
the Health Care Compliance Association, March 27, 2017. https://oig.hhs.
10 The Federal Reserve, OCC and FDIC, initiated in late 2009 a
multidisciplinary, horizontal review (“Horizontal Review”) of incentive-based compensation practices at 25 large, complex banking organizations.
In early 2012, the Federal Reserve initiated a second, cross-firm review of
12 additional large banking organizations (“2012 LBO Review”).
Regardless of current regulatory
uncertainty, supervisory risk management
expectations concerning incentive-driven
practices are heightened and focused.