Recent Rulings and Proposed Guidance on Compensation Practices
Implications for financial services industry
On October 22, 2009, the Federal Reserve System (“Federal Reserve”) issued proposed guidance to financial institutions regarding the development of incentive compensation arrangements that discourage excessive risk taking and protect the safety and soundness of banking organizations. On the same day, the Special Pay Master for Executive Compensation (“Special Pay Master”) issued Determination Memorandums to each of the seven companies that received “exceptional assistance” under the Troubled Asset Relief Program (“TARP”).
These new guidelines could have profound implications on employee talent throughout the Financial Services Industry. We expect that the restrictions on base salaries, incentive compensation, and performance measures may lead to a talent drain at those companies that have received the highest amount of Federal Government assistance.
The two documents described below provide an overview of the new rulings and their potential implications. We encourage you to download the PDFs to familiarize yourself with this information, and to share with clients as appropriate.
The Federal Reserve’s Guidance to Banking Organizations on Sound Incentive Compensation Arrangements
The proposed guidance provides the Federal Reserve with a much wider range of governance responsibility, as the Federal Reserve will be tasked with reviewing incentive compensation plans at all banking organizations and working with those organizations to appropriately re-design incentives that minimize risk. The Federal Reserve’s level of interaction with and oversight over all banking organizations with respect to incentive compensation will represent a drastic change in the way banking organizations have operated over the past several years.
The Pay Czar’s Ruling on Compensation Practices for Companies That Received “Exceptional Assistance”
The memorandums addressed the proposed compensation payments and structures for the Senior Executive Officers (“SEOs”) and certain most highly compensated employees (“HCEs”) at each of the seven companies. We have summarized the Pay Czar’s guidance on executive compensation and corporate governance practices, and identified the potential implications of his rulings.