Implementing the FSB Principles for Sound Compensation Practices and their Implementation Standards: Fifth progress report
This progress report on implementation of the FSB standards on compensation. The Principles and Standards (P&S) for sound compensation practices were published in 2009, in the aftermath of the global financial crisis and seek to reduce incentives for excessive risk-taking that may arise from the structure of compensation schemes in significant financial institutions.
Since the issuance of the P&S, supervisors and firms have directed significant attention to improving the link between risk governance and compensation practices to more effectively align compensation with sound risk-taking behaviour.
The biennial progress report shows that almost all FSB member jurisdictions have substantively implemented the P&S for banks. Indonesia and Turkey have addressed significant gaps identified at the time of the last progress report in 2015, while South Africa is yet to fully implement them. Supervisors and banks are working to ensure effective implementation of compensation systems by increased use of back testing or validating compensation practices and policies. The FSB will continue to explore ways to further assess the effectiveness of aligning compensation policies with risk at financial institutions.
The P&S introduced an international standard on deferral and the use of compensation tools to more effectively align the compensation of employees with the long-term interests of their firms, to reduce excess risk-taking. The progress report shows that in-year adjustments to compensation continue to be the compensation tool of choice. Application of malus is still rare in many jurisdictions while clawback may be subject to legal impediments or enforcement issues, more significant in a few jurisdictions.
The progress report includes a section on compensation practices in the securities sector written jointly with the International Organization of Securities Commissions (IOSCO). Most IOSCO members surveyed have some compensation-related regulation in place. The report conclude that compensation practices vary across the securities sector and variation mainly stems from the diversity of firms. Firms in the sector highlight the role of compensation as a possible tool in their overall risk management toolkit. The FSB’s Compensation Monitoring Contact Group (CMCG), is responsible for monitoring and reporting to the FSB on national implementation of the P&S. The CMCG will take forward the recommendations contained in the progress report and the next progress report will be published in 2019.