Risk and Compensation Linkages Need Further Strengthening in FS

With financial regulators devoting a great deal of focus on pay and bonus practices globally – and new rules in this area being proposed in the US – a new survey from Deloitte finds that 37% of financial institutions reported that they had completely or substantially incorporated risk management considerations into their overall performance goals and compensation decisions.

“While we saw an uptick in risk-based compensation practices, it was mostly at the senior management level,” said Edward Hida, the editor of the report and global leader – risk and capital management, Deloitte Touche Tohmatsu.

“It is even more important that financial institutions take risk management into account in performance evaluations and incentive compensation across the organisation,” said Hida. “Because of all of the attention the issue has received around the globe – there is considerable work to be done here.”

Similarly, the survey finds that while many institutions have adopted some of the specific changes recommended by regulators and others to better integrate risk management into incentive compensation, further work remains. Among senior management, 64% of institutions sought to balance their emphasis on short-term versus long-term incentives, 57% paid their incentive in company stock, and about half (52%) deferred payouts linked to future performance.

However, less than a third of institutions (31%) matched the timing of payouts to senior executives to the term of the risks involved, and 26% had instituted ‘clawback’ provisions.

Also, four out of five institutions (82%) reported that they required that a portion of the annual incentive be tied to overall corporate results.


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