A proposed inter-agency rule has been released to implement provisions in the Dodd-Frank Act that govern incentive compensation.  It would require reporting to regulators on incentive-based compensation arrangements by a covered financial institution (those with over $1 billion in assets) and prohibit incentive-based compensation that provides excessive compensation or exposes the institution to inappropriate risks that could lead to material financial loss. Tougher standards apply to larger firms (defined as those with over $50 billion in assets), where deferral of bonuses and other controls are required instead of just proposed as options institutions should evaluate to ensure a proper balance between risk and reward related to incentive compensation.  The NPR applies most of its standards not just to senior executives, as in the past, but also to any person (e.g., a trader) or groups of employees (e.g., loan officers) whose actions could result in material risk.  However, nothing in the rule applies to salary and similar “base” compensation due to its focus only on incentive-based pay, nor are any specific caps set on compensation of any sort.  Numerous policies and procedures would be mandated for boards of directors, with independent personnel and risk-management expertise required to play a significant role in setting, monitoring and enforcing incentive compensation.  Although formally approved by the FDIC and SEC, this NPR has yet to be published for public comment and outstanding disagreements may well remain among all the agencies charged with acting on it.

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