On 17 June 2019, the Financial Stability Board (FSB) published a progress report on the implementation of its ‘Principles and Standards for sound compensation practices in financial institutions’ (the P&S). The progress report assesses how compensation practices have evolved since the P&S were published in 2009.
The progress report notes that all FSB jurisdictions have implemented the P&S for all significant banks. While most banks have put in place practices and procedures which reduce the potential for inappropriate risk-taking, their effectiveness is still being tested. At most banks, further work is required to validate that practices and procedures operate effectively and cover all compensation-related risks.
The progress report also finds that:
- boards appear more active and engaged and compensation processes are now conducted with greater oversight. While human resources functions still play a key role, there is now more significant input from risk, compliance and other control functions;
- compensation arrangements now have longer time horizons and include mechanisms that better align them with effective risk management practices and include a wider range of financial and non-financial risk assessment criteria;
- while senior executives and other material risk takers remain the main area of focus, compensation and risk governance frameworks increasingly apply a baseline set of expectations and compensation-related risk management practices to all employees;
- there has been an increased focus on compensation as a tool to address conduct risk;
- there is greater emphasis on how results are achieved. Increasing effort is spent calibrating performance goals to achieve desired behaviours and non-financial performance metrics and the use of gateways for accessing variable compensation; and
- the key question now for banks and supervisors is whether the shift in the areas of focus and behaviour can be considered permanent, and the extent to which the progress shown in compensation practices is culturally embedded and permeates the institution at every level.
Fewer FSB jurisdictions have implemented the P&S for insurers and asset managers. In some cases supervisors have determined that insurers or asset managers in their jurisdiction are not significant for the purposes of implementing the P&S. However, asset management businesses within banking groups that are deemed significant are subject to consolidated application of standards and supervision and hence are also subject to the national implementation of the P&S at the entity-wide level.