FINANCIAL SERVICES
Banks making "significant progress on compensation risk alignment", says IIF
Leading banks have made major progress towards full implementation of the global standards embodied in the Financial Stability Board’s (FSB) Principles for Sound Compensation Practices, issued in April 2009. That’s the main conclusion to emerge from a major international survey by the Institute of International Finance examining reward reforms among major global banks.
Charles Dallara, managing director of the IIF, said: “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.” He added: “Risk adjustment of compensation, deferred payouts and ‘clawback’ safeguards are now central to this reform.”
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The survey was conducted by the IIF in collaboration with Oliver Wyman, an international management consultancy firm. This is the third and largest survey of its kind since the IIF developed its own broad principles for industry compensation practices in mid-2008.
Key survey results
Areas of “significant progress” described in the report include:
Risk adjusted metrics with profit after risk charges are now the primary metric used for bonus pool setting at 75% of respondents.
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.
Deferred compensation structures are now in place across the survey respondents and 91% 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.
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.
Dramatic reduction in the use of multi-year bonus guarantees, which are now negligible.
Further progress on disclosure – more than 90% of 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.
In the report the IIF and Oliver Wyman state: “We can note the beginnings of a clear shift in culture and a move to employee engagement on compensation reform. Better understanding and appreciation of compensation reform are increasing at senior levels and banks are now focused on ensuring that such understanding is transmitted throughout the organisation.”
Areas where further work is required
The report also underscored that despite the enormous progress, firms continue to work on compensation structures. In a key section of the detailed report, it is noted that areas for further work include:
The need for continued efforts on risk data and stress testing. Data issues are an ongoing area of work for all banks as respondents seek to improve accuracy and reliability of the data.
Issues related to the implementation of bonus-malus and “clawback” clauses. These features are now in place but many banks note that they expect to face practical and possibly legal challenges over the application of performance based bonus-malus and “deferral at risk/clawback” clauses in practice.
A final word
“Banks are vigorously pursuing compensation reform based on the FSB global standards and national regulatory guidance. It is important to recognise that compensation reforms are taking place in the context of broader industry efforts to strengthen market practices more generally in the wake of the financial crisis, including on governance and risk management standards.” - George T. Abed, IIF Senior Counselor.
Want to know more?
Title: Compensation Reform in Wholesale Banking 2011: Assessing three years of progress, Institute of International Finance in collaboration with Oliver Wyman, October 2011.
Survey details: The findings are based on responses from 51 leading financial institutions that together account for over 70% of the global wholesale banking revenue pool. The survey involved 26 firms in Europe, 14 in the Americas, seven in Asia-Pacific, and four in the Middle East–Africa.
Availability: You can download the 40-page report in PDF format, free of charge, at www.iif.com/press/press+213.php.
The Institute of International Finance (IIF), is the world’s only global association of financial institutions. Created in 1983 in response to the international debt crisis, members include most of the world’s largest commercial banks and investment banks, as well as a growing number of insurance companies and investment management firms. Approximately half of the Institute’s members are European-based financial institutions, and representation from the leading financial institutions in emerging market countries is also increasing steadily. Today the Institute has more than 450 members headquartered in more than 70 countries. For more details visit www.iif.com.