Compensation practices at large financial institutions were a key contributing factor to the global financial crisis. The FSB Principles for Sound Compensation Practices and their Implementation Standards (Principles and Standards, P&S) were developed to align compensation with prudent risk-taking, particularly at significant financial institutions. Importantly, they are not intended to prescribe particular designs or levels of individual compensation.
The Principles require compensation practices in the financial industry to align employees' incentives with the long-term profitability of the firm. The Principles call for effective governance of compensation, and for compensation to be adjusted for all types of risk, to be symmetric with risk outcomes, and to be sensitive to the time horizon of risks. The Principles are intended to apply to all significant financial institutions but are especially critical for large, systemically important firms.
The Implementation Standards set out detailed specific proposals on compensation governance, structure and disclosure to strengthen adherence to the FSB Principles for Sound Compensation Practices.
The standards focus on areas in which especially rapid progress is needed, including:
- independent and effective board oversight of compensation policies and practices;
- linkages of the total variable compensation pool to the overall performance of the firm and the need to maintain a sound capital base;
- compensation structure and risk alignment, including deferral, vesting and clawback arrangements;
- limitations on guaranteed bonuses;
- enhanced public disclosure and transparency of compensation; and
- enhanced supervisory oversight of compensation, including corrective measures if necessary.
The FSB website also provides links to the national regulations and supervisory guidance on compensation issued by member regulatory authorities. The FSB is not responsible for the content of external websites.
A Bilateral Complaint Handling Process (BCHP) has been established to complement and reinforce normal bilateral or multilateral supervisory channels to address compensation issues and in particular to address evidence-based complaints raised by financial institutions (FIs) to their home supervisors that document a competitive disadvantage as a result of the inconsistent implementation of the P&S by firms headquartered in other jurisdictions.