On 4 November 2021, the Financial Stability Board (FSB) issued a progress report on the implementation of its Principles for Sound Compensation Practices (Principles) and their Implementation Standards in financial institutions. The progress report focusses on:
- The effectiveness of compensation frameworks. While in-year adjustments and malus are commonly used, the use of clawback is not widespread due to ongoing legal and practical constraints. Severance payments have garnered increased attention as the application of malus and clawback conflict with labour laws that tend to protect severance payments, and hence, potentially circumvent the alignment of risk and compensation. Incorporating clawback terms and severance payments clauses in an employment contract may enhance their enforceability and effectiveness.
- Emerging trends. Firms are increasingly incorporating environmental, social and governance (ESG) aspects to drive accountability for delivering outcomes.
- Experience during the COVID-19 pandemic. The report finds that most existing compensation frameworks, and associated governance mechanisms, have demonstrated sufficient flexibility to date.