IIF: Major global banks are making significant progress on compensation risk alignment
20 October 2011
An international survey of reforms in compensation systems at leading banks shows major progress towards full implementation of the global standards embodied in the Financial Stability Board's (FSB) Principles on Compensation, issued in April 2009.
“Survey results indicate that the trajectory of change is positive across the compensation agenda and that the wholesale banking industry is now focusing on practical and detailed implementation of the FSB’s Principles”, said Mr Charles Dallara, Managing Director of the Institute of International Finance (IIF), adding that “risk adjustment of compensation, deferred payouts and “clawback” safeguards are now central to this reform”.
Areas of significant progress:
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Risk adjusted metrics with profit after risk charges are now the primary metric used for bonus pool setting at 75 per cent of respondents.
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Strengthened risk alignment of bonus calculation through improved use of risk adjusted metrics and greater involvement of the Chief Risk Officer (CRO) of the firm.
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Deferred compensation structures are now in place across the survey respondents and 91 per cent of firms have vesting periods of three years or longer for deferred compensation. Changes to payout structures have also been made to provide further alignment between risk takers’ incentives and the banks’ risk profile.
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Improved core governance systems with an enhanced role for the remuneration committee of the board to underpin its oversight responsibilities over compensation policies and practices in the firm.
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A dramatic reduction in the use of multi-year bonus guarantees, which are now negligible.
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Further progress on disclosure as over 90 per cent of survey respondents disclose core items to regulators in line with FSB and national regulatory standards. In addition, steps have been taken at a number of institutions to engage with the shareholders and the public and improve the qualitative explanations of compensation approaches.
Areas for further work include:
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The need for continued efforts on risk data and stress testing.
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Issues related to the implementation of bonus-malus and “clawback” clauses.
Press release
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