Regulatory Fatigue Syndrome: Identifying the Symptoms and Treating the Patient

Rx.jpgDuring the annual Bank Director Bank Executive & Board Compensation conference that was held recently in Chicago, Illinois, peer exchange sessions revealed that board members and executives alike are struggling to keep pace with an industry that continues to change. 

In the directors’ peer exchange meetings, directors often said that trying to keep up with the changing regulatory environment is as distracting as it is fatiguing. 

This year’s conference seemed focused on the stabilizing market, and from a director’s standpoint, establishing best practices for approving, monitoring and maintaining appropriate compensation programs, rather than on technical updates as in years past. While all this can make you feel like you’re battling the flu—proper “diagnosis and treatment” can help directors through this malady.

Symptoms of Regulatory Fatigue Syndrome

1. Blurry vision from prolonged reading of legislation, proposed regulations, guidance and advisor mailings.

2. Frequent headaches from balancing the need to eliminate risk in compensation programs to appease regulators while at the same time trying to increase the connection between pay and performance to appease institutional investors—though in many respects they can be diametrically opposed.

3. Intermittent nausea from endless board meetings that move from one regulatory issue to the next with little time for the consideration of strategic business issues.

4. General fatigue from worrying about missing one or more of the many new regulations that may or may not yet be effective.


1. Focus on current rules. Be aware of and consider proposed rulemaking, but specifically address rules that are in effect or issues that are before you today.  For example, is the bank subject to TARP or its legacy constraints? Is the bank in troubled condition and subject to the compensation limitations of Rule 359? Has the bank taken steps to implement the principles of the Guidance on Sound Incentive Compensation? Has the bank reviewed its compensation programs for its mortgage lenders, or does the bank need to publicly address a “no” vote recommendation from Institutional Shareholder Services or a bad result on a say on pay vote?

2. Review your charter. Review your compensation committee charter to ensure that your charter addresses the duties that are required of your committee based on current law. Your charter should reflect the committee’s duty to assess risk in your compensation programs and should provide for authority and funding to hire independent advisors.  Consider a committee checklist that will track the duties outlined in the charter in order to help ensure that the committee addresses each of its tasks at some time during each year.

3. Rely on your advisors. Work with your advisors to understand what regulatory changes may be coming and rely on them to let you know when you need to focus on each of the new rules. For example, do you need to deal with claw-back policies, CEO pay vs. performance disclosure, the CEO pay ratio relative to employee median pay disclosure, the compensation committee member and advisor independence requirements, or mortgage lender pay practices? 

4. Understand that risk mitigation is scalable. When trying to decipher all of the possible plan changes that might help manage, mitigate or eliminate risks, you should be mindful that the actions you take can be relative to the size and complexity of your bank and its compensation plans.  The actions taken by a $50-billion bank with complex plans are not necessarily the same that will be taken by a $1-billion bank with less complex and understandable compensation programs.  Many good practices will trickle down from the more complex organizations, but the risks are different, so your actions should be different as well.

5. Focus on establishing good procedures. Make sure you have good internal controls in place with respect to your compensation plans and that your senior risk officer is involved in the plans’ development and management. Your compensation committee should understand how the plans work, what the associated risks may be, and if changes should be made. The committee does not need to manage the plans (unless they apply to proxy officers), but they need to understand and manage the risks presented.

Certainly, this is a tongue-in-cheek approach, but fundamentally the advice is sound. Though there are many moving parts with the regulation of bank compensation practices, they can be addressed and understood by taking them one step at a time.  The old adage that “inch by inch life’s a cinch, but yard by yard it’s very hard” holds very true in trying to digest the multitude of compensation governance influences and constraints.