On October 11, 2016, the New York State Department of Financial Services (“NYDFS”) issued guidance to its regulated banking organizations regarding incentive compensation practices.  The guidance is intended to address recent concerns over compensation practices that may incentivize employees to engage in inappropriate sales practices.

NYDFS’s guidance advises all banking organizations regulated by NYDFS – including New York State-chartered banks and licensed branches and agencies of foreign banks – that no incentive compensation may be tied to employee performance indicators without effective risk management, oversight, and control.  In particular, the guidance draws attention to the “inherent risk” associated with cross-selling and referral bonus arrangements and the use of performance indicators that are tied to the number of accounts opened or number of products sold per customer.

The guidance notes that NYDFS will take enforcement action against misaligned incentive compensation arrangements and unacceptable corporate or individual conduct that results in consumer harm or other unsafe and unsound practices.  NYDFS will conduct supervisory reviews of incentive compensation practices as part of its regular examination procedures, and expects banking organizations to maintain records that document the structure, approval process, risk management, and oversight of their incentive compensation arrangements.

The guidance also restates principles from the federal banking agencies’ 2010 Interagency Guidance on Sound Incentive Compensation Policies.  These principles already apply to federally-regulated banking organizations.