FINANCIAL SERVICES
Basel Committee issues consultation on aligning remuneration and risk in banks
A consultation report on methodologies for aligning remuneration with risk and performance has been issued by the Basel Committee.
The report analyses the methods used by banks for incorporating risk into bonus pools and individual compensation schemes. It says: “Banks use various methods to adjust remuneration to take account of risk and performance. Depending on the remuneration scheme's design and detailed features, the effectiveness of such methods in creating incentives for prudent risk taking varies significantly.”
%ADVERT%
What you will find in the report
The report:
focuses on the practical and technical issues that might reduce the effectiveness of these methods
covers more general questions, including proportionality in the application of rules
contains a number of examples of banks' practices reflecting the supervisory experience to date
helps provide a picture of current remuneration practices in the industry.
The report is intended to enhance banks' and supervisors' understanding of risk-adjusted remuneration: “By providing clarification on the design of risk-adjusted remuneration schemes and by highlighting issues that may affect the effectiveness of the risk adjustment methodologies, the Committee expects the report will help support and facilitate the broader adoption of sound compensation practices in the banking sector.”
A final word
“Ensuring that remuneration is effectively aligned with risk and performance is an essential element for reducing incentives that may arise from the design of remuneration schemes and that can lead to excessive risk taking. In practice, the idea that an employee's compensation should take account of the risks that employees take on behalf of their organisation has proven to be challenging to implement. As of October 2010, effective implementation of these principles by banks has not been achieved.” - Basel Committee's report on the Range of Methodologies for Risk and Performance Alignment of Remuneration.
Comments
The Committee welcomes comments on all aspects of this document by 31 December 2010. Comments should be submitted by:
Post: Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland.
Email: baselcommittee@bis.org.
All comments will be published on the Bank for International Settlements' web site “unless a commenter specifically requests anonymity or confidential treatment”.
Want to know more?
Title: Range of Methodologies for Risk and Performance Alignment of Remuneration - consultative paper, Basel Committee on Banking Supervision, October 2010
Availability: You can download the 59-page report in PDF format from the Bank for International Settlements' web site at www.bis.org/publ/bcbs178.htm.
The Bank for International Settlements (BIS) is an international organisation which “fosters international monetary and financial cooperation and serves as a bank for central banks”. Established in 1930, the BIS is the world's oldest international financial organisation. For more details visit www.bis.org.