Managing Incentive-based Compensation Risks: Methods for Conducting Risk Reviews
Wells Fargo had an incentive-based compensation program that resulted in an order to pay a total of $185 million – including a $100 million fine from the CFPB, the largest fine ever set by the bureau – for allegedly secretly opening unauthorized deposit and credit card accounts for consumers to boost sales figures. The FDIC and OCC already conduct incentive-based compensation reviews for institutions of all sizes and new regulations have been proposed to address these compliance and safety and soundness issues for institutions with assets greater than $1 billion. We should expect enhanced regulatory scrutiny on this issue going forward.
The FDIC reviews incentive-based compensation practices as part of its safety and soundness examinations of state nonmember banks. There were 518 bank failures resolved by the FDIC between 2007 and 2015. Of those that failed, 18 institutions had incentive-based compensation programs. Most egregious from a safety and soundness perspective were incentive compensation programs tied to loan production without offsetting reductions in compensation when loans defaulted.
The OCC reviews compensation programs for larger banks. They prohibit incentive-based payment arrangements that encourage inappropriate risks by providing excessive compensation. In addition, FHFA prohibits its regulated entities from providing compensation to any executive officer that is not reasonable and comparable with compensation for employment in other similar businesses.
Since the Great Recession, institutions have implemented a number of compensation-based risk management measures:
- Risk managers and control personnel have become involved with incentive-based compensation decision making
- Control functions are participating in the design and operation of incentive-based compensation
- Institutions have started to implement methods to help validate the effectiveness of risk adjustment mechanisms
- Boards of directors are refining policies and procedures to promote some consistency and effectiveness across incentive-based compensation arrangements
- Finance and audit committees work together with compensation committees with the goal of having incentive-based compensation result in prudent risk taking
- Risk-related performance objectives and “risk reviews” are being conducted
Do these measures describe what your institution is doing? Have your risk management and internal audit functions developed a comprehensive risk review process to ensure that incentive-based compensation programs do not create excessive safety and soundness risks?
Please join Gary Deutch, CPA for this timely webinar that addresses these important compensation risk management issues.
WHAT YOU'LL LEARN
During this important webinar, Gary Deutsch will discuss:
- Methods for conducting a risk-based evaluation of compensation programs to identify safety and soundness issues
- How to identify performance measures and risk metrics related to specific activities
- Methods for evaluating the effectiveness of risk adjustments to compensation programs
- Steps for evaluating the adequacy of the documentation of the decision-making process to identify compensation program risks
- AND MUCH MORE!
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