In cases where risk adjustments are applied based on a formula, incentive compensation decisions are made using measures of financial performance that are net of a risk charge based on a quantitative measure of risk.
Such adjustments balance incentives to take risk to the extent that such charges offset increases in financial performance or reductions in costs that are associated with increased risk taking. The use of mechanical risk adjustments is possible when suitable quantitative risk measures are available, and the effectiveness of this type of risk adjustment depends on the quality of the risk measure.
One leading edge practice, observed at some firms, is to assess a charge against internal profit measures for liquidity risk that takes into account stressed conditions and to use this adjusted profit measure in determining incentive compensation awards.
Most firms in the horizontal review also used quantitative risk measures as an input to judgment-based incentive compensation decisionmaking. For example, boards of directors usually take into account available risk measures when making decisions about bonus pools for the firm or about awards for senior executives.
Some risk measures can be difficult to convert into quantitative risk charges, but nevertheless convey useful information. However, as noted previously, achieving a consistent balancing impact through judgmental decisionmaking is a challenge.
Firms with more well-developed policies and procedures to guide decisionmakers in judgmentally using quantitative risk information seemed more likely to achieve a consistent balancing impact. This is an area in which many firms are working to improve effectiveness. Almost all firms in the horizontal review use non-quantitative perceptions of risk taking as a basis for some risk adjustments.
Such adjustments have the potential to address hard-to-measure risks and limitations of existing data and risk-measurement methods. For example, the manager of a lending business might be aware that some employees of the business make riskier loans and others safer loans, even though the quantitative risk measures available to the manager do not show it. Based on this information, the manager could risk adjust by giving lower incentive compensation awards per unit of revenue to the employees making the riskier loans.
As in other cases where incentive compensation awards are based on judgment-based decisionmaking, they are more likely to be consistently effective where firms have clear policies and procedures to guide application. Developing such policies and procedures is particularly challenging because the information about risk is qualitative and the nature of the information tends to change over time.
Incentive compensation practices of firms differ in the process of determining the total bonus pools and the allocation of incentive compensation to individuals. In a top-down process, senior management and the board of directors determine the size of an overall amount of funding for the firm as a whole near the end of the performance year, and this bonus pool is then split into sub-pools for each business.
Pools are allocated to individual employees in a manner related to their individual performance. In a bottom-up process, the firm assesses performance of each employee and assigns him or her an incentive compensation award, with the total amount of incentive compensation for the year for the firm as a whole simply being the sum of individual incentive compensation awards.
Most firms' processes are a mixture of top-down and bottom-up, but the emphasis can differ markedly. Risk adjustments balance incentive compensation arrangements to the extent they affect the incentives provided to individuals.
The impact on incentives may be limited in cases where a firm makes risk adjustments only when deciding amounts of pools because the award to each employee under the pool will receive the same adjustment. This is appropriate when the nature and extent of risk taking of all employees under the pool is the same, such as cases where a pool applies to a business unit in which all risk decisions are influenced in the same way by all employees. Where individual employees in a single pool can have varied levels of impact on the amount of risk, the differences will not be fully addressed by risk adjustments to the pool alone.
In such cases, additional adjustments incorporated into decisions about individual incentive compensation awards would be needed to make the risk adjustment fully effective. Most of the firms in the horizontal review have made significant changes to their risk adjustment practices for awards for the performance year. Still, most continue to have work to do, including development of appropriate policies and procedures to guide judgmental adjustments of incentive compensation awards.
Most firms should continue to evaluate the effectiveness of the quantitative and qualitative risk adjustments they are using and whether risks are appropriately balanced. Additionally, in firms should evaluate how effective the risk adjustments used for the awards were, and make improvements as necessary.
The Federal Reserve will continue to work with the firms to make sure progress continues and to evaluate best practices in this area as they evolve. Another method for balancing incentive compensation arrangements is to defer the actual payout of a portion of an award to an employee significantly beyond the end of the performance period, adjusting the payout for actual losses or other aspects of the employee's performance that are realized or become better known only during the deferral period.
Such deferral arrangements make it possible for the amount ultimately paid to the employee to reflect information about risks taken that arrives during the deferral period.
The interagency guidance does not require that deferral be used for all employees; does not suggest any specific formula for deferral arrangements; and does not mandate the use of any specific vehicle for payment, such as stock. However, the interagency guidance does have some specific suggestions relating to deferral arrangements for senior executives.
A substantial fraction of incentive compensation awards should be deferred for senior executives of the firm because other methods of balancing risk-taking incentives are less likely to be effective by themselves for such individuals. The proportion of incentive compensation awards to be deferred was substantial at the firms in the horizontal review.
For example, senior executives now have more than 60 percent of their incentive compensation deferred on average, higher than illustrative international guidelines agreed by the FSB, and some of the most senior executives have more than 80 percent deferred with additional stock retention requirements after deferred stock vests.
Deferral periods generally range from three to five years, with three years the most common. Most organizations in the horizontal review use the same deferral period for all employees in a given incentive compensation plan and often for all employees.
Some firms transfer ownership of the entire deferred award to the employee at the end of the vesting period "cliff vesting" , while others adopted a schedule under which a portion of the award vests at given intervals.
The most common vehicles for conveying deferred incentive compensation to employees are shares of the firm's stock, stock options, and performance units an instrument with a payout value that depends on a measure of performance during the deferral period, often an accounting measure like earnings or return-on-equity.
Some firms use deferred cash or debt-like instruments. At the beginning of the horizontal review, few firms adjusted payouts of deferred awards for risk outcomes or other information about risks taken that became available during the deferral period.
Without such performance conditions, deferral arrangements are unlikely to contribute to balancing risk-taking incentives for ease of reference, deferral with performance conditions is referred to as "performance-based deferral". Firms in the horizontal review have made progress in implementing performance-based deferral arrangements that promote balanced risk-taking incentives. Each firm's setup is somewhat different, but three broad styles of arrangement were observed--formulaic, judgment-based, and a hybrid of the two.
In a formulaic approach, the percentage of the award that vests is directly related to a measure of performance during the deferral period. In a judgment-based arrangement, the circumstances under which less than full vesting will occur are decided judgmentally rather than being linked to fixed values of performance metrics, and the amount of incentive compensation paid out under those circumstances is also decided through a judgment-based process.
In a hybrid setup, a specific trigger value of performance is set at the beginning of the deferral period, and if performance falls below that trigger value, a judgment-based process determines how much of the deferred incentive compensation will not vest.
Many firms still have work to do on their policies and procedures in this area. Most firms in the horizontal review have clawback arrangements for at least some employees that are triggered by malfeasance, violations of the firm's policies, and material restatement of financial results.
While potentially effective, they do not affect most risk-related decisions and are not triggered by most risk outcomes--the narrow focus of these arrangements mean that they are unlikely to contribute meaningfully to balance. Progress on performance-based deferral for the performance year was most common for senior executives. Many firms are now in the process of revising arrangements to be used for the performance year and are extending performance-based deferral coverage to more employees as a mechanism to provide prudent risk-taking incentives.
Some firms have implemented, or are implementing, performance-based deferral for all employees receiving deferred incentive compensation, while others are doing so mainly for employees whose authorities and influence over risk taking are such that risk adjustments might have only limited effectiveness in balancing risk-taking incentives, such as senior managers within business lines and other employees engaged in activities that involve risks over a long duration.
Most of the firms in the horizontal review have made significant changes to their deferral arrangements. Many firms in the horizontal review have increased the fraction of incentive compensation that is deferred for both senior executives and other employees.
All firms have more work to do to improve their performance-based deferral arrangements. Firms may also fine-tune the role of deferral relative to risk adjustments as they gain experience with how the two work together. As firms develop and fine-tune deferral arrangements, firms should evaluate how well these deferral arrangements have worked and make improvements as necessary. The Federal Reserve will monitor and encourage progress and work to ensure that practices are effective.
Risk adjustments and deferral with performance-sensitive features represent important mechanisms for achieving balanced incentives for taking risk. The interagency guidance also identifies the use of longer performance periods for example, more than one year and reduced sensitivity of awards to short-term performance as methods for achieving balance.
During the horizontal review, we observed the use of both methods, though neither was universally used. Firms used longer performance periods that is, a backward-looking multiyear assessment horizon , for example, for senior executives in some cases, and in others for non-executive employees. Measuring and evaluating performance or awards on a multiyear basis allows for a greater portion of risks and risk outcomes to be observed within the performance assessment horizon, thus garnering many of the benefits of a deferral arrangement with performance-sensitive features.
One simple variation involves using risk outcomes from prior-year actions as a consideration in reducing current-year incentive compensation award decisions. To be effective, multiyear assessments should be based on policies and procedures that give appropriate weight to poor outcomes due to past decisions. Otherwise, adverse outcomes may be effectively ignored due to an emphasis on current-year performance.
Damping the sensitivity of incentives to measures of short-term performance was a choice made by some institutions to rein in incentives when, for example, concerns arose about the significance of the incentives or risks involved. For example, increasing bonus pools or individual award amounts at a lower rate when financial performance is well above target levels can limit incentives to take large risks to achieve extreme levels of performance.
A cap on incentive compensation awards beyond a certain level of performance is another example. However, in the horizontal review, there were few instances where such caps and reduced sensitivity were sufficient by themselves to balance risk-taking incentives.
The interagency guidance urges large banking organizations to actively monitor industry, academic, and regulatory developments in incentive compensation practices and theory to identify new or emerging methods that are likely to improve the organization's long-term financial well-being and safety and soundness. The Federal Reserve will do the same and will encourage firms to use methods that are most appropriate for their circumstances.
Identifying the full set of employees who may individually or collectively expose the firm to material amounts of risk is a crucial step toward managing risks associated with incentive compensation. Without identifying the relevant employees, a firm cannot be sure it has properly designed its incentive compensation arrangements to provide appropriate risk-taking incentives.
The interagency guidance describes three categories of such employees, which together are referred to as "covered employees": senior executives; other individual employees able to take or influence material risks; and groups of similarly compensated individuals who, in aggregate, can take or influence material risks. Incentive compensation arrangements for all covered employees should be appropriately balanced, regardless of whether the covered employee is a senior executive, an individual, or part of a group of similarly compensated individuals.
Though the Federal Reserve has no target number or quota of covered employees for any firm, many of the largest firms have determined they have thousands or tens of thousands of covered employees. Firms follow one of two general approaches to identify covered employees. One approach involves developing and following a systematic process that identifies types of risk that each employee or group of employees takes or influences and that assesses the materiality of the risks.
Such a process should "cast a wide net" and should consider the full range of types and severities of risk. Some firms have invested in enhanced information systems to facilitate this process.
Many firms in the horizontal review follow this approach. The second approach designates a very large set of employees as covered, such as all employees receiving any incentive compensation, or all employees subject to a subset of the firm's incentive compensation plans.
Although this reduces the effort required to identify covered employees, firms still need to identify the relevant types and severities of risks that are incentivized through incentive compensation arrangements to be sure incentives to take such risks are balanced.
Many firms appropriately identify at least some groups of similarly compensated employees who may collectively expose the firm to material risk. Examples include originators of mortgages, commercial lending officers, or groups of traders subject to similar incentive compensation arrangements. Several firms have yet to establish robust processes for identifying covered employees that are consistent with the interagency guidance, especially for identifying groups of covered employees. Some firms rely heavily on mechanical materiality thresholds in their identification process.
Such materiality thresholds as applied by most firms to exclude employees from being considered covered employees have three common weaknesses: 1 they often fail to capture the full extent to which an employee may expose the firm to risk, 2 they tend to exclude potential covered employees who may significantly influence risk taking but do not make final risk decisions, and 3 they often ignore groups of similarly compensated employees.
In reviewing the firms' use of thresholds, we found that under some circumstances, a suitably chosen materiality threshold could appropriately play a complementary role in identifying covered employees if used to include employees as covered employees.
FBOs with U. Generally, home-country supervisors expect their standards to be met by the consolidated organization, and so in its U. Many of these firms have home-country supervisors whose regulations focus on a more limited set of employees than described in the interagency guidance. The number of covered employees for purposes of the interagency guidance in U. All firms in the horizontal review now recognize the importance of establishing sound incentive compensation programs that do not encourage imprudent risk taking for those employees who can individually affect the risk profile of the firm.
In addition, many firms have identified groups of similarly compensated employees whose combined actions may expose the organization to material amounts of risk. Some firms have put in place a robust process for identifying relevant individuals and groups of employees, with the flexibility to adapt to the changing business environment over time.
However, some firms are still working to identify a complete set of mid- and lower-level employees, and others are working to ensure their process is sufficiently robust. The Federal Reserve will work with the firms to ensure that progress continues. Establishment of balanced risk-taking incentives should be supported by the engagement of risk-management and control personnel in the design and implementation of incentive compensation arrangements, incentive compensation for such personnel that is independent of the financial performance of the businesses they oversee in order to limit conflicts of interest , practices to promote improvements in the reliability and effectiveness of incentive compensation systems over time, and improvements in corporate governance.
These features are discussed in topics 5 through 8 below. Properly identifying risks attendant to employees' activities and setting suitable balancing mechanisms are critical elements of providing balanced risk-taking incentives. The interagency guidance notes that risk-management processes and internal controls should reinforce and support the development and maintenance of balanced incentive compensation arrangements.
Risk-management and control personnel including Internal Audit should be involved in the design, operation, and monitoring of incentive compensation arrangements because their skills and expertise provide essential perspective and support.
Risk-management staff, in particular, should participate in the firm's analysis and decisionmaking regarding the identification of covered employees, the selection of any risk-sensitive performance metrics, the development of risk-adjustment methodologies and vesting triggers, and the overall effectiveness of the firm's balancing efforts. At all firms in the horizontal review, certain functions, such as human resources and finance, traditionally were involved in incentive compensation decisions and in the design and implementation of incentive compensation arrangements.
However, this role traditionally involved little or no focus on incentives to take risk or the risk associated with the employee's activities. Risk-management personnel traditionally had relatively little involvement in incentive compensation design, and their involvement in decisionmaking was often limited, for example, to only supplying information about breaches of internal policy and procedure by individual employees or units.
However, a few firms did incorporate risk measures produced by risk-management personnel into financial performance measures used in incentive compensation decisionmaking before the crisis.
Risk-management personnel are now involved in incentive compensation system design and decisionmaking at virtually all firms in the horizontal review.
However, the intensity and nature of involvement varies. For example, risk-management functions now provide significant risk-related input to the board-level decisionmaking process for individual senior executive incentive compensation at all firms and for bonus pool size decisions at firms at which pools play a role. Most firms consider some quantitative risk measures in making at least some incentive compensation decisions; and these are usually provided by the risk and finance functions.
Nonetheless, at some firms, risk experts primarily play a peripheral or informal role. Control, finance, and risk-management staff members provide some input to individual employee performance reviews at many firms.
For example, they report breaches of policy and procedure or rate the "risk awareness" or adherence to the firm's risk appetite of individual employees or business units.
At firms that use committee structures in their incentive compensation decisionmaking process, control, finance, or risk-management personnel usually are among the members of committees. At most firms in the horizontal review, risk-management and control functions are also involved in identification of covered employees.
At firms where risk-management personnel are intensely involved in basic design decisions for the incentive compensation system, as well as in determining details of the risk-related elements of the incentive compensation process overall, progress on risk-taking incentives has tended to be faster.
At firms where risk experts play a peripheral, informal role, progress has tended to be slower, primarily because other personnel tend to have less experience and expertise in designing risk identification and measurement features. Several firms remain in the latter category.
The main challenge going forward is to ensure that risk-management and control personnel are actively engaged with incentive compensation and that improvements in risk management and in recognition of risks the firm takes are incorporated into incentive compensation decisionmaking.
The Federal Reserve will continue to work with firms to ensure that such personnel have an appropriate role. Improper incentive compensation arrangements can compromise the independence of staff in risk-management and control roles. For example, a conflict of interest is created if the performance measures applied to them, or the bonus pool from which their awards are drawn, depend substantially on the financial results of the lines of business or business activities that such staff oversee.
Such dependence can give staff an incentive to allow or foster risk taking that is inconsistent with the firm's risk-management policies and control framework or the safety and soundness of the firm.
Thus, risk-management and control personnel should be compensated in a way that makes their incentives independent of the lines of business whose risk taking and incentive compensation they monitor and control. Such staff includes not only employees assigned to firmwide risk-management or control functions, but also employees who perform similar roles while embedded within individual lines of business within the firm.
The firms in the horizontal review have completed much of the necessary work in this area. Performance measures applied to staff in risk-management and control roles are usually oriented to the performance of their oversight duties and not the performance of the line of business they oversee.
Their incentive compensation may be indirectly related to financial performance, if, for example, the bonus pool is drawn from the firmwide pool, which is related to firmwide performance.
In most cases, linkage to firmwide performance is likely to be too weakly linked to control and risk-management decisions to pose a significant conflict of interest. Where more direct or substantial potential conflicts of interest have arisen, some firms achieved independence by moving risk-management and control function personnel out of line-of-business incentive compensation plans or line-of-business bonus pools, establishing separate plans or pools for them.
Other firms established separate bonus pools for staff in risk-management and control roles, the sizes of which do not depend directly on the financial performance of a particular line of business or business activity. What is the optimal payout dispersion? How to ensure the top performers are paid the highest and the low performers less? What-If Analysis A robust dataset is also useful for conducting What-If Analysis by examining different scenarios and the potential benefits, payouts and growth that may be realized from certain incentive plans.
Attainability The historical baseline and the What If Analysis can help managers assess whether likelihood of whether individuals and teams can meet the targets, or whether the bonus levels are attainable. Accruing Each month, the automated system quickly records an incentive compensation accrual.
Designing Incentive Compensation Plans Creating an effective incentive compensation plan is tough. Your plan must achieve these things: Staying within the budget Attracting and retaining top talent Motivating the sales team to focus on corporate-desired behaviors Satisfying all three, and managing the ongoing tension between them, is a difficult task.
The costs of a poorly designed incentive compensation plan is steep. How do we benchmark compensation for each particular role? Look at what your competitors are paying for simlar roles. Assure responsibilityes are clearly definited.
How do we determine what fair-pay is relative to benchmarks? Align your budget with what you expact each particular role to produce. What is the best compensation plan design for each particular role? Simplicity is the key. Miring your team in complex plans will create confusion and decrease employee morale. How do we calculate the cost implications of our proposed compensation plan?
Assure your sales revenue is growing with your sales commissions. How do we communication these decisions to the team? With complete transparency, down to every detail. This will increase employee trust and morale. Your sales leader may call for mid-year comp plan changes. A compensation analysis will help prevent knee-kerk reactions within your team. How do we measure the effectivess of our compensation plans?
Measure payout against attainment. If you can't meausre it objectively, do not pay on it. Add new comment Your name. About the author. A stockbroker should check with their company to see if they need to take the Series 63 and Series 65 separately or only take the Series Before anyone starts a career as a stockbroker and takes these licensing exams, they need to make sure they can pass a criminal and credit background check. Passing a criminal and credit background check is a requirement for employment in a brokerage firm.
You can take the SIE exam before you are employed by a brokerage firm. You need to be employed by a brokerage firm to take the remaining tests. This allows you to take the Series 7 exam.
Before you take the Series 7 exam, take as many practices tests as you can so you will feel comfortable taking this exam. Employers typically provide new hires all the study materials they need to pass the Series 7 and Series 63 exams. Professional traders generally spend long days on the job. There is a lot of prep work before the trading day begins. Much of the trading happens online. Traders also must meet with clients and attend broker meetings. They also do a lot of paperwork after the market closes for the day.
Stock markets are the financial infrastructure of the country. Careers as stock traders, especially Wall Street traders, are demanding and require considerable experience to understand the mobility of the markets and the comparative risks for investors involved in trading.
That expertise and experience account for the comparatively high salaries traders earn. While the top earners across the country might be corporate executives, some Wall Street stock traders give these professionals a run for their money in annual salary compensation.
With such responsibility comes generous compensation, especially for those who have worked on Wall Street for years and have earned generous company bonuses for their dedication to their work. So, what makes Wall Street different from other markets? Wall Street got its name in the 17th century when Dutch settlers erected a wall to keep the British troops and pirates out of the area. Today, Wall Street is home to large and small brokerage firms, commercial and investment banks, hedge funds, mutual funds, insurance companies, and other financial companies.
Some of these businesses have headquarters in other parts of the country, but their presence in the New York exchange earns them a seat on Wall Street. Wall Street is considered the financial capital of America and the world.
One thing that is notable about trading stocks is that the world of Wall Street is worlds away from what stock traders earn in other parts of the country. Those who work on other stock exchanges, including those in San Francisco or Philadelphia, tend to make about half as much as their Wall Street counterparts. There is a reason why each stock trading job opening on Wall Street attracts thousands of highly qualified applicants.
Traders who are less experienced and newer to the field can earn this salary. According to the Bureau of Labor Statistics, this salary is nearly three times higher than the median executive wage. One thing that is worth noting is that most Wall Street traders receive bonuses. Yet, they do not receive anything close to the stock options and other financial perks that most corporate executives receive. They do, however, receive healthy retirement packages or even pensions.
Most traders have excellent health insurance packages that cover most of their healthcare needs with little money out-of-pocket. The same is not true of traders in other parts of the country or investors who work in other industries.
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