Proposed Incentive-Based Compensation Arrangements
Section 956 of the Dodd-Frank Act requires the banking agencies (NCUA, FDIC, Federal Reserve System, Federal Housing Finance Agency, OCC, and the SEC) to jointly prescribe regulations or guidelines to prohibit incentive-based payment arrangements that the agencies determine to encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss.
Section 956 also requires that the regulations or guidelines require financial institutions to disclose information about the structure of their incentive-based compensation arrangements in sufficient detail to allow regulators to determine whether the arrangements provide excessive compensation or could lead to material financial loss.
The requirement applies to all financial institutions with total assets of $1 billion or more. NCUA was the first agency to release to latest proposed rule. An earlier proposal was released in 2011.
The covered institutions are divided into three asset categories: Level 1 applies to institutions with $250 billion and above (0 credit unions), Level 2 applies to institutions with $50 billion to $250 billion (1 credit union), and Level 3 applies to institutions with $1 billion to $50 billion (257 credit unions).
For all levels (§751.4):
The credit must not establish or maintain any type of incentive-based compensation arrangement that encourages inappropriate risks by the credit union by providing a covered person with excessive compensation, fees, or benefits; or that could lead to material financial loss to the credit union.
- A covered person is any executive officer, employee, or director who receives incentive-based compensation.
- Excessive compensation, fees, or benefits occur when the amounts paid are unreasonable or disproportionate to the value of the services performed.
- An incentive-based compensation arrangement encourages inappropriate risks that could lead to material financial loss to the credit union, unless the arrangement appropriately balances risk and reward, is compatible with effective risk management and controls, and is supported by effective governance.
An incentive-based compensation arrangement will not be considered to appropriately balance risk and reward unless:
- The arrangement includes financial and non-financial measures of performance, including considerations of risk-taking, that are relevant to a covered person’s role within the credit union and to the type of business in which the covered person is engaged and that are appropriately weighted to reflect risk-taking,
- The arrangement is designed to allow non-financial measures of performance to override financial measures of performance when appropriate in determining incentive-based compensation, and
- Any amounts to be awarded under the arrangement are subject to adjustment to reflect actual losses, inappropriate risks taken, compliance deficiencies, or other measures or aspects of financial and non-financial performance.
The credit union’s board of directors, or a committee thereof, must conduct oversight of the incentive-based compensation program, approve incentive-based compensation arrangement for senior executive officers, and approve any material exceptions or adjustments to incentive-based compensation policies or arrangements for senior executive officers.
The credit union must annually create, and maintain for seven years, records that document the structure of all its incentive-based compensation arrangements, and disclose the records to the NCUA upon request. The records, at a minimum, must include copies of all incentive-based compensation plans, a record of who is subject to each plan, and a description of how the incentive-based compensation program is compatible with effective risk management and controls. The credit union does not have to report the actual amount of compensation, fees, or benefits to the NCUA.
The NCUA may require Level 3 credit unions, with total assets over than $10 billion to comply with all or some of the provisions placed on Level 1 and Level 2 credit unions.
Comment Period ends July 22, 2016
https://www.ncua.gov/About/Documents/Agenda%20Items/AG20160421Item2b.pdf