The Financial Stability Board (FSB) published a summary of the key takeaways from its virtual, industry workshop, which was a part of the regular assessment of effectiveness of the implementation of the principles for sound compensation practices and the associated implementation standards. The workshop was an opportunity to exchange information on key compensation issues and challenges for the effective alignment of risk and compensation, with an additional focus on the impact of the pandemic on firms’ compensation practices.
At the workshop, the participants:
- identified trends in the use of non-financial criteria, potential differences across sectors, and how these criteria affect and are affected by firm culture. Firms expect the use of non-financial criteria such as reputation, diversity and inclusion, and environmental, social and governance (ESG) factors to be even more widespread over the next five years and continue to reinforce the firm culture.
- identified effective practices for alignment between risk and compensation and how practices may vary across sectors. Firms highlighted the critical role of internal control functions in governance and remuneration. They also noted that, at the level of board committees, a mechanism to ensure close collaboration between risk and remuneration committees exists. Firms acknowledged that remuneration is one of the most influential drivers of risk alignment; however, the overall corporate culture plays an important role in addressing various kinds of misconduct.
- focused on the most significant legal and regulatory impediments to the use of compensation tools, such as malus and claw-back and possible steps to address these. The session also explored firms’ use of severance pay.
- discussed compensation-related actions firms and supervisors have taken in relation to the pandemic, noting that most remuneration frameworks were sufficiently flexible to respond to the prolonged pandemic. The firms did not require a overhaul to their frameworks and some regulators saw better alignment of values as well as incorporation of ESG metrics in the firms they supervise. One authority observed changes, such as better alignment of firms’ compensation plans to their values and the creation of programs to encourage employees to work in the best interest of customers; this was driven by both external pressure and the adoption of ESG metrics in its strategy and objectives. One firm also mentioned that it implemented more transparent disclosures during the pandemic.
Keywords: International, Banking, Insurance, Securities, Remuneration, Compensation Practices, Governance, ESG, COVID-19, Operational Risk, FSB
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