United States: Federal Agencies Release Joint Proposed Rule On Financial Institution Incentive-Based Compensation

Last month, consistent with their obligation under the Dodd-Frank Act, several federal agencies released for comment a joint proposed rule that would prohibit any incentive compensation that encourages inappropriate risk taking by a covered financial institution: (a) by providing an executive officer, employee, director or principal shareholder with excessive compensation; or (b) that could lead to material financial loss to the institution.  Companies that are not covered by this proposed rule should also be aware of the proposed rule because it could signal the future of incentive compensation rules for other industries.  While the full text and commentary of the proposed rule (all 700 pages of them) can be found here, this blog post is intended to highlight its contours and some of its key points.

Covered Financial Institutions The proposed rule applies to "covered financial institutions" that have over $1 billion in average total consolidated assets.  Each applicable federal agency has its own definition of a covered institution, but generally they include depository institutions, broker-dealers, credit unions, and investment advisors.  There will also be "levels" of financial institutions based on asset size with more rigorous requirements for the larger institutions.

  • Level 1 – Greater than or equal to $250 billion in average total consolidated assets
  • Level 2 – Greater than or equal to $50 billion and less than $250 billion in average total consolidated assets
  • Level 3 – Greater than or equal to $1 billion and less than $5- billion in average total consolidated assets.

Prohibition on Inappropriate Risk The proposed rule prohibits covered institutions from establishing or maintaining incentive compensation arrangements that encourage inappropriate risk. Inappropriate risk is encouraged where (a) a covered individual is provided with excessive compensation or (b) the arrangement could lead to material financial loss to the covered institution.

  • Excessive Compensation. Compensation is excessive when amounts paid are unreasonable or disproportionate to the value of services performance, taking into consideration all relevant factors. Relevant factors include the: (a) value of all compensation paid to the covered individual; (b) compensation history of the covered individual and comparable individuals; (c) financial condition of the institution; (d) compensation practices of comparable institutions; (e) for post-employment benefits, the projected total cost and benefit to the institution; and (f) any connection between the covered individual and any fraudulent act, breach of trust/duty or insider abuse.
  • Material Financial Loss. Incentive compensation is considered to encourage inappropriate risk that could lead to material financial loss to the covered institution, unless such arrangement: (a) appropriately balances risk and reward; (b) is compatible with effective risk management and controls; and (c) is supported by effective governance.

    • Balance Risk and Reward. The proposed rules provide several levels of requirements in attempt to balance risk and reward. Level 1 and 2 institutions are subject to much stricter requirements.

      • Performance. Incentive compensation does not appropriately balance risk and reward unless it: (a) includes financial and non-financial measures of performance; (b) is designed to allow non-financial measures of performance to override financial measures (when appropriate); and (c) is subject to adjustment to reflect actual loss, risks, compliance deficiencies or other measures/aspects of performance. There are several more stringent requirements for Level 1 and Level 2 institutions. For example, Level 1 and Level 2 institutions may not award performance based compensation that exceed target measures in excess of 125% for senior executives.
      • Deferrals. Level 1 and Level 2 institutions are subject to mandatory deferral requirements. The amount and deferral period depends on the individual covered as well as the type of compensation.  For example, a Level 1 institution would be required to defer at least 60% of a senior executive's qualifying incentive based compensation (i.e., annual bonuses) for at least 4 years.
      • Forfeiture. Level 1 and Level 2 institutions must make subject to forfeiture all unvested deferred incentive based compensation for certain covered individuals, including senior executives.
      • Downward Adjustments. Level 1 and Level 2 institutions must make subject to subject to downward adjustment all incentive based compensation awarded to certain covered individuals (including senior executives) that has not yet been awarded for the current performance period.
      • Clawback. Level 1 and Level 2 institutions are required to include clawback provisions in their incentive based compensation arrangements for covered individuals, including senior executives. The clawback provision would allow recovery of vested incentive compensation if certain events occur (i.e., engaging in misconduct that results in significant harm to the institution).
    • Risk Management and Controls. Level 1 and Level 2 institutions must (a) have a risk management framework for incentive compensation (i.e., provide for monitoring and internal controls), (b) grant appropriate authority to individuals engaged in control functions, and (c) provide independent monitoring of incentive plans, compliance with the proposed rules, and compliance with institutional policies and procedures.
    • Effective Governance. The board of directors of each covered institution would be required to: (a) conduct oversight of incentive compensation programs; (b) approve incentive compensation for senior executives; and (c) approve material exceptions or adjustments to incentive compensation for senior executives.  Additionally, Level 1 and Level 2 institutions would be subject to additional requirements, namely, such institutions must establish compensation committees composed of directors who are not senior executives.

Recordkeeping.  Each covered institution must create annually and maintain for at least 7 years records that document the institution's incentive compensation arrangements and demonstrate compliance with the proposed rules. Level 1 and Level 2 institutions would need to maintain additional records with additional information.

Effective Date Comments to the proposed rules must be received by July 22, 2016.  Thereafter, the compliance date for the final rule would be no later than the beginning of the first calendar quarter that begins at least 540 days after the final rule is published.  The proposed rule would not apply to any incentive compensation plan that has a performance period that begins after the above compliance date.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.