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As compensation committees within a bank begin their review process, it can become challenging to get things right. Boards need to take into consideration the elements of their compensation plan, and how to best implement them into their overall strategy. Here are some challenges boards face in getting compensation plans right:

Philosophy. Bank boards must determine their bank’s philosophy in terms of compensation. Whether it’s an abundance mentality or a zero-sum equation, setting compensation practices correctly will maintain a healthy balance.

Regulatory. There are three major regulatory constraints that overlay any bank’s compensation structure. The first being the Internal Revenue Code Section 409A, prohibiting the acceleration of payment of deferred compensation. The second regulation originates from the Dodd-Frank Act, which means that mortgage compensation incentives can only be paid based upon: (i) the dollar volume of the mortgage loans made; or, (ii) the transaction volume generated by the mortgage lender. The third regulation is the Interagency Guidance on Sound Incentive Compensation Policies. According to the guidance, policy steps require incentive compensation to be structured to balance the risk to the institution of such incentives.

Delivery. How does your bank delivery compensation? Non-statutory stock options, Incentive stock options, restricted stock, deferred compensation and bank-owned life insurance (BOLI) are just some of the major ways banks pay their executives.

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