Risk-Based Compensation Practice in the US

Risk-based compensation is a practice whereby banks and financial institutions create attractive compensation packages as an incentive for executive employees willing to make risky —inherently unsafe—business and financial decisions. The recent history of the financial markets strongly suggests that the practice of incentive-based compensation compel bank executives to turn a blind eye to the true dangers of their investment decisions.

As a result of the tumultuous financial markets, banks and financial institutions in the United States and Europe now face increased regulatory pressure to eliminate compensation practices that foster excessive risk-taking. On June 25, 2010, U.S. bank regulators issued their final risk-based compensation guidance which made clear that banks and other financial institutions are expected to immediately bring themselves into compliance.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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