USA: FDIC proposes to include employee compensation structure risk in its deposit insurance assessment

The Federal Deposit Insurance Corporation is proposing to include an assessment of the potential risks posed by employee compensation structures in its deposit insurance assessment system: see its advanced notice of proposed rulemaking (ANPR) document, available here (pdf). The premiums paid to the FDIC by financial institutions will, therefore, reflect an assessment of the risks posed by compensation structures within contributing institutions. In its ANPR document the FDIC states that it:

... does not seek to limit the amount which employees are compensated, but rather is concerned with adjusting risk-based deposit insurance assessment rates (risk-based assessment rates) to adequately compensate the Deposit Insurance Fund for the risks inherent in the design of certain compensation programs. By doing this, the FDIC seeks to provide incentives for institutions to adopt compensation programs that align employees’ interests with the long-term interests of the firm and its stakeholders, including the FDIC. Such incentives would also seek to promote the use of compensation programs that reward employees for internalizing the firm’s focus on risk management. This initiative is intended to be a complementary effort to the supervisory standards being developed both domestically and internationally to address the risks posed by poorly designed compensation programs".

In the ANPR document the FDIC identifies some possible features of compensation programmes which will be consistent with its goals (see p. 8). One such feature is administration by a board committee consisting of independent directors with input from independent compensation professionals.