s resources to take more than is necessary to attract and motivate quality employees. additionally, as evidenced by the very fact of ken feinberg ’ s job as special master, the public has an interest in appropriate compensation arrangements at firms in which the government has made significant investments. broader issues of fairness may also be raised by high compensation levels for some employees. of course, these issues can quickly involve rather fundamental considerations of political philosophy and political economy. at present, the public debate over the fairness of the views expressed here are my own, and do not necessarily reflect those of other members of the board of governors of the federal reserve. compensation levels in financial firms has a more specific focus. many would argue that the bonuses that may be collected this year by employees of some financial firms and, for that matter, the profits accruing to the firms themselves, are possible only because the government rescued the entire financial system through a series of actions beginning last year. seen in this light, the bonuses and profits appear to some observers as an unfair channeling of gains to private actors, after potentially devastating losses to those same firms and employees were avoided by placing taxpayer funds at risk. each of the foregoing perspectives on compensation raises important policy issues. but the regulatory framework established by statute makes them relevant to the supervisory functions of the federal reserve only to the extent they affect the safety and soundness of financial institutions. an evaluation of some compensation practices at banking organizations preceding the financial crisis reveals that they did, in fact, contribute to safety and soundness problems. indeed, financial firms have themselves identified compensation practices as a factor. in this regard, i was struck by the results of a survey conducted earlier this year on behalf of the institute of international finance. 2 of the 37 large banking organizations engaged in wholesale banking activities that responded, 36 agreed that compensation practices were a factor underlying the crisis. of particular note are incentive compensation arrangements for employees in a position to expose the firm to substantial risk that failed to align the employees'interests with those of the firm. for example, some firms gave loan officers incentives to write a lot of loans, or traders incentives to generate high levels of trading revenues, without sufficient regard for the risks associated with those activities. the revenues that served as the basis for calculating bonuses were generated immediately, while the risks might not have been realized for months or years after the transactions were completed. when these or similarly misaligned incentive compensation arrangements were common in a firm, the very foundation of sound

compensation arrangements at banking organizations should be supported by strong corporate governance practice, including active and effective oversight by boards of directors. this oversight should go beyond reviewing and approving the compensation arrangements for senior executives. boards of directors, or their compensation committees, should regularly review the design and functioning of the firm ’ s incentive compensation practices to ensure their consistency with safety and soundness. in developing these principles, we were guided by two key considerations. the first, as i noted earlier, is that problematic compensation practices were not limited to the most senior executives at financial firms. traders with large position limits and loan officers who, as a group, originate loans accounting for a material amount of an organization ’ s credit risk, are two examples of non - executive personnel who have the ability to expose a banking organization to material amounts of risk. for this reason, our guidance extends beyond the senior executives at banking organizations to include all other employees who, individually or as a group, may expose the firm to material amounts of risk. second, in drafting this guidance we opted for principles, rather than generally applicable rules. the complex and varying nature of financial activities, particularly those of large banking organizations, suggested that uniform requirements for compensation arrangements were not well - advised, at least not on the basis of our present knowledge and experience. activities and risks, as well as the reliability of related risk measures, may differ significantly across banking organizations and across employee groups within one banking organization. in these circumstances, we concluded that use of a single, formulaic approach to making incentive compensation arrangements risk - sensitive would likely not be effective in adequately containing risky behavior. as discussed in the guidance, incentive compensation arrangements for senior executives at a large, complex organization are likely to be better balanced if they involve deferral of a substantial portion of the executives ’ incentive compensation over a multiyear period, with payment made in some form of equity that is ultimately calculated with reference to the performance of the firm during the deferral period. however, the use of equity - based incentive compensation may not be effective in aligning the incentives of mid - and lower - level employees with the interests of the firm, because these employees may view the outcomes of their decisions as unlikely to have much effect on the firm or its stock price. moreover, deferral may not be effective in constraining the incentives of employees who have the ability to expose the firm to long - term or " bad tail " risks, as these risks are unlikely to be realized during a