Insider Activities

Compensation and Benefits Paid to Insiders

Compensation and fees paid to insiders must serve the legitimate needs of the bank, must be justified by the services rendered, and must be reasonable in amount. In assessing this area, all forms of remuneration, including salary, fees, benefits, stock options and the receipt of other goods and services, should be considered.

As set forth in interagency guidelines, banks should maintain safeguards to prevent the payment of compensation, fees, and benefits that are excessive or that could lead to material financial loss to the bank. (See 12 CFR Part 30, Appendix A: Interagency Guidelines Prescribing Standards for Safety and Soundness.) An insider’s compensation is considered excessive, and is therefore prohibited as an unsafe and unsound practice, if it is unreasonable or disproportionate to the services actually performed. The following factors should be considered in determining whether compensation is excessive:

• The combined value of all cash and non-cash benefits provided to the individual in relation to the services rendered.

• The compensation history of the individual and other individuals with comparable expertise and responsibilities at the institution.

• The financial condition of the institution, including reasonable projections.

• Compensation practices at comparable institutions, based upon such factors as asset size, geographic location, and the complexity of the bank’s asset mix, products, and services.

• For post-employment benefits, the projected total cost and benefit to the institution.

• Any other relevant factors.

As noted above, compensation packages may include non-cash benefits. One such permissible non-cash benefit is a bank’s purchase of directors and officers liability insurance. This insurance protects against the expense of defending lawsuits (and paying related damages) alleging director or officer misconduct. Some of this insurance reimburses the bank for payments made to directors and officers under indemnification agreements, and the rest reimburses the directors and officers for expenses that the bank is unable to indemnify. This insurance does not cover criminal or dishonest acts, events from which the insider obtained personal gain, or circumstances in which a conflict of interest was apparent.

Financial institutions whose securities are listed on the national exchanges may have additional requirements regarding the adoption and disclosure of compensation guidelines.

Many banks may rely on incentive pay to attract, motivate, and retain insiders. However, incentive-based compensation arrangements that provide incentives contrary to the safe and sound operation of the institution should be avoided. It is the board’s responsibility to review and closely monitor all insider incentives to ensure that they do not result in any unreasonable risk-taking to the bank.

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