Compensation Practices – Implementation

The G20 Leaders in the November 2011 Cannes Summit Declaration, called on the FSB to “undertake an ongoing monitoring and public reporting on compensation practices focused on remaining gaps and impediments to full implementation of these standards and carry out an ongoing bilateral complaint handling process to address level playing field concerns of individual firms”.

The FSB has designated compensation practices as one of the priority areas for implementation monitoring. The task of regular monitoring and reporting in this area is carried out by the FSB Compensation Monitoring Contact Group (CMCG). CMCG activities include monitoring and reporting on national implementation in this area and on the results of the bilateral complaint handling process, a mechanism by which national supervisors from the FSB member jurisdictions work together to verify and, as needed, address specific compensation-related complaints by financial institutions that give rise to level playing field concerns.

The FSB published its third annual report to the G20 on the implementation and effects of the G20 financial regulatory reforms in July 2017. Below is an extract from this report on the status of implementation of compensation reforms.

Adoption of regulatory and supervisory frameworks for compensation is almost completed.

• All FSB jurisdictions have fully, or almost fully, implemented the FSB Principles and Standards for Sound Compensation Practices, which aim to reduce incentives for excessive risk taking that may arise from the structure of firms’ compensation schemes.
• Authorities remain focused on embedding oversight of compensation practices in bank supervision and further improving the governance and risk alignment of compensation. Supervisors and banks are working to evaluate effective implementation by back-testing or validating compensation systems.
• The FSB has examined the role of compensation policy and tools in broader efforts to address misconduct risks, with a focus on banks. There is considerable variation across jurisdictions in the use of provisions for malus (to adjust the unvested portion of employees’ variable compensation on an ex post basis) and clawback (to recover the vested portion) in the event of misconduct. This may reflect, in part, uncertainties in the enforceability of these provisions. The FSB published a consultation with supplementary guidance to the Principles & Standards on the use of compensation tools to address misconduct risk.