Federal Reserve Board Proposes Guidance On Incentive Compensation

Article by Steven D. Lofchie , Julius L. Loeser , Mark A. Holdsworth and Bryan T. Shipp

On October 22, 2009 the Board of Governors of the Federal Reserve System ("Board") released proposed Guidance on Sound Incentive Compensation Policies (the "Compensation Guidance") applicable to certain banking organizations as described below.¹

The proposal puts forth three key risk management principles that banking organizations must observe in developing and implementing incentive compensation arrangements.² Broadly speaking, these principles require affected banking organizations to (i) develop incentive compensation arrangements that do not encourage employees to take "excessive" risk, (ii) structure their risk management programs to effectively monitor risk exposures created by incentive compensation arrangements, and (iii) place responsibility on the Board of Directors for establishing appropriate incentive compensation arrangements. These three key principles,