April 3, 2011

Banks and the new incentive compensation imperative

The Federal Reserve recently released their Guidance on Sound Incentive Compensation Policies which was designed to ensure that incentive compensation at banking organizations do not encourage imprudent risk-taking. The three principles are:
  • Incentive compensation should balance risk and reward and not encourage imprudent risk taking
  • Risk management processes and internal controls should reinforce the support, development and maintenance of balanced incentive compensation arrangements
  • Incentive compensation programs should be supported by strong corporate governance
The result is that incentive compensation policies and practices are going through a sea-change for banks. Boards of directors will now have to routinely review compensation plans and performance of those plans for all covered employees.  By the end of 2010, governing agencies are going to actively monitor the progress of banks, and identify leading practices in incentive compensation. Banks will be encouraged to adopt these leading practices in an ‘expeditious manner’.
Risk Management groups will play an increasing role in the design and evaluation of new incentive compensation plans. New regulations are on the horizon that will continue to put pressure on banks to respond quickly to new imperatives.  Finance, Human Resource, Information Technology and Control functions will all have to come together to manage incentive compensation much more quickly, with more agility and richer and deeper analysis than ever before.
Today, many banks use a collection of spreadsheets, legacy software, home grown and manual solutions to manage incentive compensation.  They were not designed to support the scrutiny and demands of this new world of incentive compensation.
Today’s complete incentive compensation solutions provide financial institutions solutions to help them manage through this change.
With a packaged incentive compensation system banks can:
  • Build, Report, model and analyze incentive compensation with accurate and timely compensation data
  • Effectively communicate incentive plans and incentive plan changes across the organization
  • Monitor and assess plan effectiveness
  • Quickly and efficiently make changes to incentive compensation plans and procedures
  • Audit and track each and every change to plans, data, metrics and disputes

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