Take a balanced approach to incentive compensation
Abstract: For many banks, a strategically designed compensation plan — one that includes performance incentives — is critical to success. But a poorly designed program can encourage executives to engage in activities that maximize short-term returns while putting the bank’s long-term health at risk. This article discusses the FFIEC’s Interagency Guidance on Sound Incentive Compensation Policies and its three key principles to help banks design incentive compensation programs that are both safe and effective. The guidance also identifies four methods currently used to build risk into the compensation decision. A sidebar notes that new compensation rules for large banks could “trickle down” to community banks.