Incentive Compensation Back Under the Regulatory Spotlight

Six U.S. federal agencies in late April and May revised and re-proposed rules that were originally proposed in 2011, to govern the incentive compensation practices at financial institutions with consolidated assets of at least $1 billion (covered institutions). The proposed rules include new – and more stringent – requirements, especially for the largest institutions. The rules will impact the compensation practices at a wide variety of financial institutions, including banks, broker-dealers and investment advisers, as well as the U.S. operations of foreign banking organizations.

The proposed rules are designed to ensure that the interests of certain “covered persons” who receive incentive-based compensation at a financial institution are aligned with the longer-term health of the institution. Toward this end, under the proposed rules, a certain percentage of incentive compensation offered to “senior executive officers” and “significant risk-takers” at the largest organizations (i.e., institutions with assets in excess of $50 billion) would generally be subject to forfeiture, downward adjustment and/or clawback for specified periods of time, so as to expose such persons to the same longer-term risks that may ultimately affect the financial institution.

In addition, covered institutions would be required to adopt robust corporate and risk management practices governing their incentive compensation programs, and comply with disclosure and recordkeeping requirements. This OnPoint provides a brief summary of the proposed rules and their impact on covered institutions, in a question and answer format.

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