Compensation & Misconduct in Banking

FinTech brg

On 10 May 2016 the Financial Stability Board (FSB) hosted a round table on compensation practices to share experiences and lessons on the use of compensation tools to address misconduct in banks.

Senior executives responsible for risk and remuneration functions at 22 large internationally active banks and officials from the FSB Compensation Monitoring Contact Group (CMCG) participated in the round table.

Key takeaways  

The round table considered the processes for governing and applying compensation and related risk management tools to help better identify, mitigate and redress misconduct risk.

Participants also explored challenges related to use of current tools, including differences in their application among jurisdictions and also discussed the relative importance of compensation tools compared to other approaches to handling misconduct.

Participants believe that compensation tools are just part of the toolkit used in reducing the risks of misconduct; some banks advocated more (principle-based) dialogue between firms and supervisors on the full set of tools used to manage talent and culture with a focus on:

  • promoting good behaviours including effective use of compensation tools
  • enhancing individual accountability at all levels of the organization
  • providing guidance on what “good behaviours” look like

Participants indicated that there has already been significant change with most firms recognising that compensation and conduct are directly linked.

Furthermore firms are increasingly looking to actively manage conduct via compensation tools:

  • ex ante (explicit performance targets and encouragement of positive behaviour) and
  • ex post (ensuring appropriate consequences for poor behaviour)

More generally, banks are focused on turning values into actions and ensuring that lines of business “own” conduct risk; at most banks, codes of conduct set the framework for expected behaviour and are supported with explicit expectations for roles and responsibilities.

Banks pointed to the importance of “tone from the top” in signalling where to place the balance between performance and customer and counterparty interests while recognising the importance of long-term relationships with all customers. They noted however, that to be effective and to actually change culture and values, a holistic approach to culture, conduct, and employee development and reward systems must be developed, all of which takes time.

A number of banks requested more guidance from regulators on “what good looks like” and welcomed initiatives such as round tables to share examples of better practice. Notwithstanding this, they also emphasised the importance of allowing time to embed existing regulations.

Without doubt, regulators are holding boards accountable for culture and in this context the role played by rewards in driving behaviours. This is a key issue for the Remuneration Committee and in particular it’s Chair.

The real challenge for directors and senior executives is to understand “what actually happens” on a day to day basis in their firms. Econometrics provide only partial answers. Increasingly boards will need to evidence observed behaviours and the steps taken to prevent, stop and/or remedy conduct failures; including how their observations link back to reward systems.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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