The Federal Reserve just finished up its horizontal review of large banking organizations and released a report that looks at incentive compensation practices at such firms. The report is available at:
Banks in the horizontal review with the oversight of the Federal Reserve and other banking agencies, implemented new practices to make their employees’ incentive compensation sensitive to risk. The four key areas that were addressed by banks involved in the horizontal review were:
- Incentive Compensation Design-making the amount of incentive compensation take into account the risk an employee’s activities may pose to the organization, and deferring payout of a portion of incentive compensation.
- Identifying Key employees-those who have a hand in risk taking.
- Risk-Management Processes and Controls-involving risk-management and control personnel when considering and carrying out incentive compensation arrangements.
- Corporate Governance Frameworks-changing the frameworks to become attentive to the risk-taking incentives created by the incentive compensation process for employees throughout the firm, not just to senior executives.
The report indicates that work still needs to be done in some of the above areas by the banks but that progress has been made.