Federal Reserve Board Issues Proposed Guidance on Incentive Compensation

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On October 22, 2009, the Federal Reserve Board issued for comment a proposal designed to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of their organizations. The Federal Reserve is taking a flexible approach by not dictating pay or specifying what kind of compensation plans banking organizations must adopt. However, the proposal will create a two-tier system of supervising compensation, using different approaches for 28 of the largest banking organizations and thousands of smaller banks, which would be subjected to a review with their regular bank examinations. The comment period is 30 days after publication of the proposed guidance in the Federal Register, but banking organizations are expected to immediately review their incentive compensation arrangements to ensure that they do not encourage excessive risk-taking and to implement corrective programs where needed.

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