WASHINGTON (CN) – The Federal Deposit Insurance Corporation is requesting comments regarding whether it should penalize insured institutions with higher Deposit Insurance Fund assessments when it determines they have risky employee compensation plans.
The FDIC maintains that it is not attempting to eliminate any particular compensation plan through increased rate assessment but it does recognize the “broad consensus that some compensation structures misalign incentives and induce imprudent risk” by rewarding “…employees based on short-term results without full consideration of the longer-term risks to the firm.”
The Federal Deposit Insurance Act requires that a depository institution’s deposit insurance assessment must be based on the probability that the Deposit Insurance Fund will incur a loss, the amount of any loss, and the revenue needs of the DIF. In 2009 employee compensation plans were cited as a contributing factor in an institution’s failure in 35 percent of the agency’s investigations.
The agency hopes that using assessment rates will provide incentives for insured institutions to adopt compensation programs that align employees’ interests with those of the institution’s other stakeholders.
According to the agency, such compensation plans would limit stock awards to restricted, non-discounted companies that would be available at intervals over a period of years after an employee meets multi-year performance goals. The agency also believes that any cash bonuses or stock awards should be subject to so-called “clawback” provisions in case the performance a bonus is based on later proves to have been illusory or deceptive.