Fourth progress report on compensation practices
This is the fourth progress report on Implementing the FSB Principles for Sound Compensation Practices and their Implementation Standards, which aim to reduce incentives for excessive risk-taking that may arise from the structure of compensation schemes in significant financial institutions. The FSB conducts an annual review of the implementation of the Principles and Standards in all FSB member jurisdictions in response to a request at the 2011 G20 Leaders’ Summit.
The progress report concludes that almost all FSB jurisdictions have now fully implemented the Principles and Standards for banks. The oversight of compensation practices has now been fully embedded in bank supervisory frameworks in most jurisdictions. More than half of the jurisdictions assess the level of implementation by significant banks as “high” in the three areas of governance, risk alignment and stakeholder engagement. In particular, the risk alignment of compensation structures, at least for senior executives, shows improvements in various respects. Additionally, compensation and risk governance frameworks are increasingly linked.
The report notes that existing compensation provisions, if appropriately calibrated and applied rigorously, should enable firms to more effectively prevent or deter misconduct. However, the effectiveness of these mechanisms remains largely untested and more analysis is needed to examine the case for strengthening disincentives.
The report finds that for insurers there remain important differences in the implementation of the Principles and Standards across different jurisdictions, with fewer jurisdictions having adopted dedicated regulation or supervisory guidance than for the banking sector.