[Federal Register Volume 63, Number 108 (Friday, June 5, 1998)]
[Rules and Regulations]
[Pages 30584-30587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14970]
[[Page 30584]]
=======================================================================
-----------------------------------------------------------------------
FEDERAL HOUSING FINANCE BOARD
12 CFR Part 932
[No. 98-24]
RIN 3069-AA76
Compensation and Conflicts-of-Interest Rules for Federal Home
Loan Bank Employees
AGENCY: Federal Housing Finance Board.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Federal Housing Finance Board (Finance Board) is issuing a
final rule amending its regulation on compensation of Federal Home Loan
Bank (Bank) employees (Compensation regulation) and its regulation
governing conflicts of interest of Bank employees (Conflicts
regulation). The final rule makes two specific changes to the existing
Compensation regulation to address issues that have arisen since the
regulation was last revised in January of 1997. First, the final rule
eliminates the existing limits on the base salaries and incentive
payment opportunities of a Bank's employees other than the President,
and establishes an overall limit on cash compensation for such
employees equal to 125 percent of the base salary cap established by
the Finance Board for the Bank's President. Second, the final rule
eliminates unnecessary regulatory requirements regarding the payment of
bonuses to Bank employees. The final rule amends the Conflicts
regulation by adding an exception for non-exempt hourly Bank employees.
DATES: The final rule is effective on June 5, 1998.
FOR FURTHER INFORMATION CONTACT: Ellen Hancock, Associate Director,
Compliance Assistance Division, Office of Policy, (202) 408-2906; or
David Guy, Associate General Counsel, (202) 408-2536, Federal Housing
Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
A. Base Salaries and Incentive Payments for Bank Employees
Section 12(a) of the Federal Home Loan Bank Act (Bank Act) provides
that each Bank may fix the compensation of Bank employees, subject to
the approval of the Finance Board. See 12 U.S.C. 1432(a). From 1992 to
1996, the Finance Board approved the compensation of Bank Presidents
pursuant to Sec. 932.41(a) of its regulations and the Bank Presidents'
Compensation Plan (Compensation Plan) established by the Finance Board.
See 12 CFR 932.41(a) (January 1, 1996 revision) (amended 61 FR 2 (Jan.
4, 1997)); Bd. Res. No. 91-565 (as amended). Under the Compensation
Plan, the boards of directors of the individual Banks were authorized
to set the base salaries of the Bank Presidents, subject to Finance
Board approval, within ranges established by the Finance Board. Under
the Compensation Plan, the Banks also were authorized to make incentive
payments to their Presidents in amounts up to a maximum percentage of
base salary, as determined by the Finance Board. The Finance Board's
Compensation regulation did not contain specific standards governing
the base salaries or incentive payments for Bank employees other than
the Presidents. On January 2, 1997, after providing the public with
opportunity for notice and comment, the Finance Board published a new
Compensation regulation, which, among other things, superseded the
Compensation Plan and provided new standards governing the base
salaries and incentive payments for Bank Presidents and other Bank
employees. See 61 FR 2 (Jan. 4, 1997). The 1997 revisions to the
Compensation regulation eliminated the use of Finance Board-established
salary ranges and now permit each Bank to set its President's base
salary, subject to a cap to be published annually by the Finance Board.
See 12 CFR 932.41(b)(1)(i). The 1997 revisions also established a
dollar limit on a Bank President's total cash compensation payable in
salary and incentive payments of 125 percent of the amount of the base
salary cap established by the Finance Board for that Bank. Thus, a Bank
President's maximum incentive payment allowable under the Compensation
regulation is the difference between the President's annual base salary
approved by the Bank and 125 percent of the annual base salary cap for
the Bank. See id. Sec. 932.41(c)(2)(i).
In establishing a base salary cap and the 125 percent limit on
total cash compensation for Bank Presidents, the Finance Board
explicitly intended to permit the Banks to choose incentive
compensation levels for their Presidents higher than 25 percent of the
Presidents' base salaries. Specifically, under the Compensation
regulation, the further a Bank set its President's base salary below
the cap, the higher the President's potential incentive payment
opportunity. The Finance Board believes that incentive compensation is
an important and useful management tool, and it made the regulatory
change described above in response to comments from the Banks and
others that the industry trend in setting compensation for chief
executives and other employees of financial institutions was to
allocate increasingly higher percentages of total cash compensation to
incentive compensation rather than base salary.
While the Compensation regulation now permits the Banks to make
this kind of adjustment in the way they compensate their Presidents,
most of the Banks have not taken advantage of this flexibility. Most of
the Banks have set their Presidents' base salaries at or near the cap
established by the Finance Board. Consequently, the Presidents receive
the bulk of their cash compensation in base salary. Eight of the Banks
have established incentive payment opportunities for their Presidents
ranging from 25 to 27.8 percent of base salary. Under the Compensation
regulation, the maximum incentive payment opportunity for a Bank
employee other than the President is linked to the incentive payment
opportunity of the President. Section 932.41(c)(3)(ii) of the
Compensation regulation provides that the total incentive payment
opportunity, expressed as a percentage of base salary, for an employee
other than the Bank President shall not exceed the total incentive
payment opportunity, expressed as a percentage of base salary,
allowable for the Bank President. See id. Sec. 932.41(c)(3)(ii). In
addition, Sec. 932.41(b)(2) of the Compensation regulation provides
that no employee's base salary may exceed the base salary of the Bank
President.
The purpose of linking the maximum incentive payment opportunities
of the Bank Presidents and other Bank employees was to ensure a measure
of consistency between the President and other employees regarding the
allocation of compensation between base salary and incentive pay.
Specifically, in providing the Banks with flexibility to allocate
compensation between base salary and incentive pay, the Finance Board
wished to prevent a Bank from paying a large percentage of total cash
compensation to employees other than the President in the contingent
form of incentive pay, while paying the President mostly in the form of
guaranteed base salary.
Because most of the Banks have set the base salaries of their
Presidents at or near the caps published by the Finance Board, and
thereby limited the Presidents' maximum incentive payment opportunities
to the minimum percentage of base salary available under the
regulation, these Banks are
[[Page 30585]]
unable to provide increased incentive payment opportunities to their
other employees, due to the limitation in Sec. 932.41(c)(3)(ii) of the
Compensation regulation. As further discussed below, several of the
Banks have voiced concerns that this is impairing their ability to hire
and retain key personnel below the level of President. As discussed
above, these Banks have the option to address this situation by
reducing their Presidents' base salaries and increasing their
Presidents' incentive payment opportunities, which would allow the
Banks to increase incentive payment opportunities for their other
employees. However, the Banks have not viewed reducing their
Presidents' base salaries as a viable alternative, and the Finance
Board does not wish to make this the Banks' sole option. Therefore, the
Finance Board is eliminating the link between the maximum base salaries
and incentive payment opportunities of the Bank Presidents and other
Bank employees, and establishing instead an overall dollar limit on
cash compensation for a Bank's employees other than the President equal
to 125 percent of the base salary cap established by the Finance Board
for the Bank President.
B. Payment of Bonuses
Section 932.41(f) of the Compensation regulation provides that a
Bank shall not pay any employee or other person a bonus. See id.
Sec. 932.41(f). A bonus is defined in the Compensation regulation as
``a payment to an employee, other than base salary and benefits, that
is not based on performance.'' Id. Sec. 932.41(a). As further discussed
below, the Finance Board is eliminating the provisions of the
Compensation regulation governing bonuses because they have proved
confusing and duplicative with the provisions of the regulation
governing incentive payments for Bank employees. See id.
Secs. 932.41(a), (c)(3)(iii).
C. Conflicts of Interest
Section 12(a) of the Bank Act provides that each Bank may select
and employ such officers, employees, attorneys, and agents as shall be
necessary for the transaction of its business, subject to the approval
of the Finance Board. See 12 U.S.C. 1432(a). The Finance Board's
Conflicts regulation, set forth at 12 CFR 932.40(d), provides that a
Bank employee shall not also be employed by, or otherwise act in any
capacity for, a member or an institution eligible to make application
to become a member. See 12 CFR 932.40(d).
Several of the Banks maintain item processing operations in which
they employ non-exempt hourly employees who also have full- or part-
time positions with financial institutions that are, or are eligible to
make application to become, members of the Bank. The Finance Board has
determined that based upon the nature of the work performed by these
Bank employees, it is unlikely that any conflict of interest between
the Bank and a Bank member or an institution eligible to make
application to become a member would be created as a result of
concurrent employment by a Bank and such institution. Consequently, the
Conflicts regulation, as currently stated, unnecessarily impedes a
Bank's ability to hire qualified employees for its item processing
operations. See Bd. Res. 98-06 (Feb. 18, 1998). On this basis, the
Finance Board has waived the Conflicts regulation, as applied to the
non-exempt hourly employees working in the item processing operations
of the Topeka, Pittsburgh and Indianapolis Banks. See id.
The Finance Board believes that the rationale for waiving
application of the Conflicts regulation to non-exempt hourly employees
working in a Bank's item processing operations applies with equal force
for all non-exempt hourly Bank employees. Therefore, the final rule
adds a specific exception to the Conflicts regulation for all non-
exempt hourly employees of the Banks, so that such employees may be
employed concurrently by a Bank and a member or an institution eligible
to make application to become a member.
II. Analysis of the Final Rule
A. Base Salary and Incentive Payments for Employees Other than the Bank
President
As discussed above, several of the Banks have raised concerns that
the limit on incentive payment opportunities for employees other than
the President set forth in Sec. 932.41(c)(3)(ii) of the Compensation
regulation constrains the Banks' ability to attract and retain
experienced and highly qualified personnel in key areas of Bank
operations, such as auditing, asset/liability management, investments,
risk analysis, and accounting. In addition, this poses an immediate
problem for the Banks in attracting and retaining qualified personnel
to assist in Year 2000 information systems conversion processes.
While there is no concern that the Banks' ability to attract key
personnel has had any negative impact on the safety and soundness of
their operations to date, the Finance Board believes that there is a
credible risk that, in the future, the Banks may be placed in a non-
competitive position relative to other employers of financial and
banking professionals. The Finance Board wishes to prevent a situation
in which the Banks' ability to compete for the highest quality
personnel is unduly limited.
For these reasons, the Finance Board is making the following
changes to the provisions of the Compensation regulation governing base
salary and incentive payments of Bank employees other than the
Presidents. First, the final rule eliminates the limitation in
Sec. 932.41(c)(3)(ii) on incentive payment opportunities for Bank
employees other than the President. Consequently, such employees may
have incentive payment opportunities in excess of that of a Bank's
President. However, incentive payments for employees other than the
President will continue to be subject to the requirement in
Sec. 932.41(c)(3)(i) of the Compensation regulation that such payments
be reasonable and comparable with incentive payments made to employees
of the other Banks and other similar businesses (including financial
institutions) with similar duties and responsibilities. See id.
Sec. 932.41(c)(3)(i).
Second, in order to give the Banks maximum flexibility in
allocating total cash compensation for employees other than the
President between base salary and incentive pay, the final rule
eliminates the requirement in Sec. 932.41(b)(2) of the Compensation
regulation that no Bank employee may have a base salary higher than
that of the President. See id. Sec. 932.41(b)(2).
Third, the final rule establishes an overall limit on total cash
compensation for a Bank's employees other than the President equal to
125 percent of the base salary cap established by the Finance Board for
the Bank's President. This limit is the same as under the existing
Compensation regulation; however under the existing regulation, it is
embodied in two separate limits on base salary and incentive payments
for Bank employees other than the President, which, as discussed above,
are eliminated by this final rule.
The Finance Board is hopeful that the Banks will use this new
flexibility in structuring cash compensation for employees other than
the President to enhance their strategic plans for mission achievement,
which are under consideration at the Banks. The Finance Board will look
at the degree to which the Banks have tied incentive compensation for
employees other than the President to mission-related goals, similar to
the those that form the basis the Bank Presidents' incentive payments,
in deciding whether further
[[Page 30586]]
regulatory action in this area is warranted.
The final rule adds a new Sec. 932.41(c)(3)(iv) to the Compensation
regulation, requiring all Bank incentive compensation plans in effect
on May 1, 1998, to be submitted to the Finance Board no later than June
1, 1998. This section further provides that any subsequent amendments
to such plans shall not become effective until submitted to the Finance
Board. The effect of this provision is to make the effectiveness of any
changes a Bank may adopt to its incentive programs for employees other
than the President contingent upon the submission of such changes to
the Finance Board, but does not contemplate any action to approve or
disapprove the submissions. Of course, these policies and their
implementation are subject to compliance review as part of the regular
examination process.
B. Payment of Bonuses
The Compensation regulation, as revised in 1997, carried forward an
existing regulatory provision prohibiting the payment of bonuses to
Bank employees. See id. Sec. 932.41(f). The 1997 revisions also for the
first time adopted a regulatory definition of ``bonus'' as ``a payment
to an employee, other than base salary and benefits, that is not based
on performance.'' Id. Sec. 932.41(a).
The Banks have questioned whether the new definition of ``bonus''
prevents an employee from receiving incentive payments based on the
achievement of Bank-wide performance targets. For many years, several
Banks have maintained incentive programs for employees under which
incentive payments are based, in part, on the extent to which the Bank
achieves certain corporate performance targets. Several Banks have
requested confirmation that such programs remain permissible in light
of the new definition of ``bonus.''
The 1997 revisions were not intended to preclude the Banks from
maintaining existing or establishing new employee incentive programs
linked to Bank performance. Under Sec. 932.41(c)(3)(iii) of the
Compensation regulation, the Banks may make incentive payments to
employees other than the Bank President based on the extent to which an
employee meets objective performance targets related to criteria
established by the Bank's board of directors. See id.
Sec. 932.41(c)(3)(iii). The Compensation regulation defines ``incentive
payment'' as ``a direct or indirect transfer of funds by a Bank to a
Bank employee, in addition to base salary, based on the employee's on-
the-job-performance.'' Id. Sec. 932.41(a).
The Finance Board believes that the achievement of Bank-wide
performance targets may be the basis for employee incentive payments as
long as there is a reasonable nexus between the job performance of the
employee and the achievement of the performance target. The extent to
which a Bank achieves its corporate performance targets may be
considered a reflection of the on-the-job performance of each of the
Bank's employees. The regulatory changes discussed above regarding
incentive payments for employees other than the Presidents provide the
Banks with the opportunity to integrate Bank-wide goals related to
mission achievement into the incentive payment plans of employees whose
jobs may not be directly related to the mission of the Bank, but whose
support is crucial to the Bank's overall performance, such as the Chief
Financial Officer.
The definition of ``bonus'' was added in 1997 to carve out non-
performance related incentive payments from the category of permissible
incentive payments. However, the Finance Board believes, and it is the
Finance Board's intention, that the definition of ``incentive payment''
in Sec. 932.41(a), coupled with Sec. 932.41(e)(1), which prohibits a
Bank from making any payment to a Bank employee except as provided in
the Compensation regulation, see id. Sec. 932.41(e)(1), preclude a Bank
from making non-performance related incentive payments to Bank
employees. Therefore, removal of the prohibition in Sec. 932.41(f) on
the payment of bonuses and the definition of ``bonus'' would clarify
the provisions of the Compensation regulation governing employee
incentive payments without substantively changing the prohibition on
non-performance related incentive payments. Based on the foregoing, and
in light of the confusion caused by the provisions on employee bonuses,
the Finance Board is eliminating Sec. 932.41(f) and the definition of
``bonus'' in Sec. 932.41(a).
C. Conflicts of Interest
For the reasons discussed in the Statutory and Regulatory
Background section, the final rule adds a specific exception to the
Conflicts regulation for all non-exempt hourly employees of the Banks.
III. Procedural Requirements
The Finance Board has determined that the rule shall be effective
upon publication in the Federal Register, for the reasons discussed
below.
The Administrative Procedure Act (APA) does not require adherence
to notice-and-comment procedures when an agency ``for good cause finds
* * * that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' 5 U.S.C.
553(b)(3)(B). In addition, the 30-day delay in the effective date of a
rule ordinarily required by section 553 of the APA will not apply where
the rule relieves a restriction or upon a showing of good cause by the
agency adopting the rule. See id. Sec. 553(d)(3).
The Finance Board finds good cause to forgo notice-and-comment
procedures as unnecessary in connection with lifting the limitations on
allocating the base salary and incentive payment components of the
total cash compensation for Bank employees other than the President
because this regulatory action imposes no new requirements on the Banks
or their employees. Furthermore, engaging in notice-and-comment
procedures would be contrary to the public interest, because it would
prolong existing conditions under which the Banks may be at a
competitive disadvantage in attracting and retaining highly experienced
and qualified personnel, due to the existing limits on incentive
payments for such employees. The longer these conditions persist, the
greater the potential risk that there will be a negative impact on the
operations of the Banks. Furthermore, the Finance Board believes that
the Banks should be free to take immediate action to adjust their
compensation programs in order to attract and retain personnel involved
in preparing their information systems for 2000. Therefore, the Finance
Board finds good cause to forgo a delayed effective date for this
change. In addition, the 30-day delay of effective date is not mandated
under the APA, because this change relieves a restriction on the Banks'
authority to set employee compensation.
Elimination of the provisions of the Compensation regulation
governing employee bonuses will not have a substantive effect on the
Banks, because they are duplicative of existing provisions governing
the Banks' employee incentive payments. Therefore, the Finance Board
has determined that notice-and-comment procedures and a delay in the
rule's effective date are unnecessary with regard to this change.
As discussed above, the Finance Board has determined that, based
upon the nature of the work performed by non-exempt hourly Bank
employees, it is unlikely that any conflict of interest between the
Bank and a Bank member
[[Page 30587]]
or an institution eligible to make application to become a member would
be created as a result of concurrent employment by a Bank and such
institution. Furthermore, the Finance Board previously has permitted
such dual employment through the granting of waivers for three Banks.
Consequently, the Finance Board has determined that notice-and-comment
procedures are unnecessary in connection with amendment to the
Conflicts regulation set forth above. The 30-day delay of effective
date is not mandated under the APA for this change, because it relieves
a restriction on the Banks' authority to select and employ personnel.
IV. Regulatory Flexibility Act
The Finance Board is adopting these regulatory amendments in the
form of an final rule. Therefore, the provisions of the Regulatory
Flexibility Act do not apply. See 5 U.S.C. 601(2), 603(a).
List of Subjects in 12 CFR Part 932
Conflict of interests, Federal home loan banks.
Accordingly, the Federal Housing Finance Board hereby amends title
12, chapter IX, subchapter B, part 932 of the Code of Federal
Regulations as follows:
SUBCHAPTER B--FEDERAL HOME LOAN BANK SYSTEM
PART 932--ORGANIZATION OF THE BANKS
1. The authority citation for part 932 continues to read as
follows:
Authority: 12 U.S.C. 1422a, 1422b, 1426, 1427, 1432; 42 U.S.C.
8101 et seq.
2. Amend Sec. 932.40 by revising paragraph (d) to read as follows:
Sec. 932.40 Selection.
* * * * *
(d) Conflicts of interest. A Bank employee shall not also be
employed by, or otherwise act in any capacity for, a member or an
institution eligible to make application to become a member. The
restriction on employment set forth in the preceding sentence shall not
apply to non-exempt hourly employees of a Bank.
3. Amend Sec. 932.41 by removing the definition of ``Bonus'' from
paragraph (a), removing paragraph (f) and redesignating paragraph (g)
as paragraph (f), revising paragraphs (b)(2) and (c)(3)(ii), and adding
a new paragraph (c)(3)(iv) to read as follows:
Sec. 932.41 Compensation.
* * * * *
(b) * * *
(2) Other Bank employees. Each Bank shall establish base salaries
for employees other than the President that are reasonable and
comparable with the base salaries of employees of the other Banks and
other similar businesses (including financial institutions) with
similar duties and responsibilities.
* * * * *
(c) * * *
(3) * * *
(ii) The sum of annual base salary and all incentive payments
received in a single calendar year by an employee other than the Bank
President shall not exceed 125 percent of the annual base salary cap
for the Bank President, as published by the Finance Board.
* * * * *
(iv) All Bank incentive compensation plans in effect on May 1,
1998, shall be submitted to the Finance Board no later than June 1,
1998. Any subsequent amendments to such plans shall not become
effective until submitted to the Finance Board.
* * * * *
By the Board of Directors of the Federal Housing Finance Board.
Dated: May 13, 1998.
Bruce A. Morrison,
Chairman.
[FR Doc. 98-14970 Filed 6-4-98; 8:45 am]
BILLING CODE 6725-01-P