Implementing the FSB Principles for Sound Compensation Practices and their Implementation Standards: Sixth progress report
This progress report assesses the implementation of the FSB’s Principles and Standards for sound compensation practices (P&S) and how compensation practices have evolved since 2009.
The report finds that FSB jurisdictions have implemented the P&S for sound compensation for all banks considered significant for the purposes of the P&S. While most banks have put in place practices and procedures which reduce the potential for inappropriate risk-taking, their effectiveness is still being tested. At most banks, further work is required to validate that practices and procedures operate effectively and cover all compensation related risks. International supervisory dialogue has facilitated increased attention to compensation design and implementation, contributing to better practice. Authorities remain focused on compensation practices, with many now incorporating assessment of compensation practice as part of ongoing supervisory review processes. The report highlights that for significant banks a number of changes have taken place:
Boards appear more active and engaged and compensation processes are now conducted with greater oversight.
Compensation arrangements now have longer time horizons, include mechanisms that better align them with effective risk management practices and include a wider range of financial and non-financial risk assessment criteria.
In recent years, there has been an increased focus on compensation as a tool to address conduct risk and there is now greater emphasis on how results are achieved.
The next challenge is developing frameworks for assessing the effectiveness of compensation policies and practices in balancing risk and reward. Compensation systems should be monitored and reviewed to ensure that they operate as intended.
The P&S are intended to apply to financial institutions that are significant for the purposes of compensation standards including banks, insurers and asset managers. In most jurisdictions, identified institutions are mainly in the banking sector. Fewer jurisdictions have implemented the requirements for the insurance and asset management sectors.
As supervisors continue to monitor compensation practices at financial institutions that are significant for the purpose of the P&S, they will need to ensure that compensation remains aligned with prudent risk taking, and fully reflects evolving risks and new areas of vulnerabilities as they emerge.