5/9/2012 How to Compensate in Today’s Regulatory Environment Jon McDowell, BKD, LLP Kathy Smith, Bank Compensation Consulting Kelly Earls, Bank Compensation Consulting May 17, 2012 To Receive CPE Credit • Participate in entire webinar • Answer polls when they are provided • If you are viewing this webinar in a group o Complete group attendance form with  Title & date of live webinar  Your company name  Your printed name, signature & email address o o All group attendance sheets must be submitted to [email protected] within 24 hours of live webinar Answer polls when they are provided • If all eligibility requirements are met, each participant will be emailed their CPE certificates within 15 business days of live webinar 2 Increased Regulations • Federal Deposit Insurance Corporation (FDIC) • The Department of the Treasury • Comptroller of the Currency, Administrator of National Banks • U.S. Securities & Exchange Commission (SEC) • United States Federal Reserve System 3 1 5/9/2012 New Compensation Rules • Interagency Guidance on Sound Incentive Compensation Policies (Federal Reserve Guidance) June 25, 2010 • Dodd‐Frank Wall Street Reform & Consumer Protection Act (Dodd‐Frank) July 21, 2010 • FDIC rule implementing Sec 956 of Dodd‐Frank builds on above regulations • SEC – say‐on‐pay rules • Regulation Z rules for compensating mortgage loan originators (MLO) 4 Success of Financial Institutions • Compensation arrangements are critical in successful management of financial institutions o o o o Attracting skilled staff Promoting better organizationwide & employee performance Providing retirement security to employees Allowing organization’s personnel costs to vary along with revenues 5 Federal Reserve Guidance on Compensation • Why was it implemented? o o Common belief that poorly designed & unbalanced compensation structures contributed to financial industry crisis in 2007, 2008 & 2009 Short‐term nature of growth in revenue & profit with little regard to risk 6 2 5/9/2012 Three Principles in Guidance • Provide incentives that balance risk & reward from financial results that do not encourage employees to expose institution to imprudent risks • Be compatible with effective controls & risk management • Be supported by strong corporate governance with effective & active oversight by board of directors 7 Dodd‐Frank • Nonbinding vote on executive pay & golden parachutes • Shareholder proxy access • Independent compensation committees • No compensation for lies • SEC review • Enhanced compensation oversight for financial industry 8 FDIC Rules for Sec 956 • • • • • The new rule affects institutions of $1 billion or more Prohibits inappropriate risk‐taking Requires deferred compensation Requires additional reporting Requires disclosure of policies & procedures 9 3 5/9/2012 Regulation Z • MLOs under strict compensation rules • Consumer Financial Protection Bureau (CFPB) taking broad approach to MLO compensation • Message is inconsistent with other regulatory agencies • Recent clarification to guidance • Additional clarification coming this year • How to incent your MLOs 10 Concluding Comments • Know that regulators are serious about it & it will be part of their exam • Review existing plans if you have not already • Review financial institution’s internal risk management & control processes with respect to compensation matters & oversee that financial institution has proper corporate governance processes to meet requirements of guidance. This entire process should be well‐documented for regulatory review during exam process 11 Jon McDowell, CPA | Partner | 210.341.9400 | [email protected] Kathy Smith | President | 972.781.2020 | [email protected] Kelly Earls, J.D., CPA | Principal | 972.781.2020 | [email protected] 4 5/9/2012 Continuing Professional Education (CPE) Credits BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org. The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. 13 CPE Credit • Up to 1 CPE credit will be awarded upon verification of participant attendance; however, credits may vary depending on state guidelines • For questions, complaints or comments regarding CPE credit, please email BKD Learning & Development Department at [email protected] 14 5