Second progress report on compensation practices
This is the second progress report on the implementation of the FSB Principles for Sound Compensation Practices and their Implementation Standards (P&S). The report, which was prepared by the FSB Compensation Monitoring Contact Group (CMCG), focuses on remaining gaps and impediments to full implementation of the P&S and describes some of the key challenges and evolving practices in this area. The main findings are as follows:
First, all FSB member jurisdictions except two (Argentina and Indonesia) have now completed the implementation of the FSB Principles and Standards (P&S) in their national regulation or supervisory guidance. The focus now is on effective supervision and oversight of implementation of these rules by relevant firms. All FSB jurisdictions include the oversight of compensation structures in their ongoing supervisory plans, and most of them have intensified supervision in this area to varying degrees. Such actions are enabling supervisors to engage in a more constructive dialogue with firms and to better influence compensation practices. Most supervisory authorities report that they now have a good sense of pay practices in their markets, and exercise a good degree of oversight on the evolution of pay structures at supervised institutions.
Second, disclosure of compensation practices has improved. Most jurisdictions report that the majority of their supervised firms now disclose in annual remuneration reports significant and detailed information on compensation structures. This can be attributed partly to enhanced disclosure requirements for publicly listed firms and partly to the enactment of specific prudential disclosure requirements, including those for Pillar III of the Basel II/III framework.
Enhanced disclosures can lead to more awareness by firms' Boards of the need to explain their remuneration decisions. They have also contributed, and in some cases been the response to, increased attention given to executive compensation by various stakeholders, particularly shareholders. In some jurisdictions public attention has further increased recently in connection to specific incidents (e.g. Libor investigations), which have also prompted institutions to issue public reports and to be more responsive in adjusting compensation for both negative performance and compliance and risk issues. Disclosures may be less useful when they are too detailed or technical and the institution fails to clearly convey the major features of its remuneration approach. It is still generally difficult for policymakers and the public to reliably access easy to understand and consistent data on compensation structures for significant firms across jurisdictions.
Third, authorities report that firms' implementation efforts continue and that progress is being made. Most authorities are of the view that the implementation of the P&S and related supervisory action, among other factors, has had a high impact on changes in compensation practices for supervised institutions. It has also been noted that, although there are still improvements to make, the mind-set of institutions has changed, as they are now willing to comply and acknowledge that risks stemming from variable remuneration have to be managed. Reported trends since the 2011 peer review suggest that most compensation structures are being revised in the direction indicated by the P&S. Most jurisdictions report increases in the percentage of pay that is deferred and/or longer periods of deferral; increases in the use of equity as a form of compensation; and increased use of maluses for both financial performance and compliance or behaviour issues.
Fourth, several authorities note that firms still express some level playing field concerns with regard to jurisdictions that may not have fully implemented the P&S or that do not supervise their firms adequately for this purpose. At the same time, however, national authorities have yet to see any real evidence that the implementation of the P&S has impeded or diminished the ability of supervised institutions to recruit and retain talent. The Bilateral Complaint Handling Process, which the FSB initiated for the purposes of addressing level playing field concerns, has not so far been activated by firms in FSB member jurisdictions.
Fifth, certain regulatory initiatives currently being implemented could materially change compensation structures in some FSB member jurisdictions. In particular, the adoption by the European Union (EU) of the fourth Capital Requirements Directive (CRD IV) includes requirements on compensation structures that go beyond those in the P&S. The implementation of the Directive will foster convergence of compensation practices for all credit institutions and designated investment firms operating in the European Economic Area. At the same time, concerns have been expressed, particularly by a few non-EU FSB member jurisdictions, about the prescriptive nature of these requirements. In particular, these jurisdictions suggest that the introduction of a limit on the ratio between fixed and variable compensation for MRTs may have unintended consequences, such as creating obstacles to the ability of internationally active firms to implement a global approach to compensation structures, or resulting in the adoption of a larger proportion of fixed compensation in their EU operations. These issues are also relevant to ensuring a level playing field.
Sixth, further work is needed on the identification criteria for material risk takers (MRTs). This is an area where there is a broad range of practices across jurisdictions and firms, partly due to differences in relevant national regulations and supervisory guidance (and on their level of prescriptiveness), and partly because of the different size, nature or complexity of institutions. It is not yet clear whether the diversity in practices and experimentation among firms and jurisdictions is leading to significantly different outcomes or which approaches are most effective. Continue reading