Pub. 5 2010-2011 Issue 2

www.nebankers.org 18 Extraordinary Service for Extraordinary Members. that reviews of bank practices with re- spect to compensation will impact both ratings and enforcement. Regarding ratings, the Federal Re- serve’s findings will be incorporated into the bank’s ratings related to risk management, internal controls, and corporate governance. Relating to enforcement, the Fed has stated that it may take enforcement action if it deems that a bank’s “compensation arrangement or related risk manage- ment, control, or governance processes pose a risk to the safety and soundness of the organization.” (Federal Reserve Proposed Guidelines, Oct. 22, 2009) There are several key areas of guid- ance that impact the design of compen- Q Compensation Policies we’re Always CLOSE BY NetWorks is the Electronic Funds Transfer (EFT) service provider that Nebraskans have used and learned to trust like family for over 30 years. Since our offices are right here in Nebraska, you can count on us to provide quick and personalized service for all of your EFT needs. Give us a call and let’s talk about how we can simplify EFT for you. You will talk with a fellow Nebraskan and not some automated system. www.netseft.com Toll Free 800-735-6833 Local 402-434-8202 sation programs and bank operations. 1. Performance metrics are key. According to the guidelines, “The performance measures used in an incentive compensation arrange- ment have an important effect on the incentives provided employees.” 2. Incentive compensation should consider risk and reward, and different payments should be made for different levels of risk. According to the guidelines, “An incentive compensation ar- rangement is balanced when the amounts paid to an employee ap- propriately take into account the risks, as well as the financial ben- efits, from the employee’s activities and the impact of those activities on the organization’s safety and soundness.” (“Employee” refers to executives and non-executives whose activities impact the risk in the business.) “Under a balanced in- centive compensation arrangement, two employees who generate the same amount of short-term revenue or profit for an organization should not receive the same amount of incentive compensation if the risks taken by the employees in generating that revenue or profit differ materi- ally.” According to the guidelines, programs “should be implemented so that actual payments vary based on risks or risk outcomes.” 3. All risks should be considered. According to the guidelines, banks “should consider the full range of current and potential risks associat- ed with the activities of employees, including the cost and amount of capital and liquidity needed to sup- port those risks . . . including credit, market, liquidity, operational, legal, compliance, and reputational risks . . . as well as the time horizon over which those risks may be realized.” 4. New incentive compensation programfeatures shouldbe im- plementedasneeded, andexist- ing programfeatures should be reviewed and revised. Suggested program features for consideration in the new incentive compensation