March 28, 2019

MAS published an information paper on incentive structures in the banking industry. MAS has been intensifying the supervisory focus on financial institutions’ culture and conduct. As part of these efforts, MAS conducted a series of thematic inspections on incentive structures of selected banks in 2018, recognizing the fundamental role of incentives in influencing behavior and outcomes. The focus of MAS on incentive structures is intended to ensure that bank practices promote ethical behavior, which considers customer interests and prudent risk-taking for long-term financial soundness, to achieve a healthy organizational culture.

The inspections covered incentive structures of front office staff in the Private Banking, Global Markets, and Corporate Banking businesses. They included assessments of the banks’ governance over, and frameworks and policies for, performance evaluation, remuneration, and consequence management and whether these were aligned with the FSB Principles and Standards for Sound Compensation Practices. MAS also held industry roundtable and townhall events in 2019 to share observations and exchange views with the industry following the thematic inspections. This paper sets out several desired outcomes for incentive structures that MAS expects to see in banks. In particular:

  • Performance evaluation of staff takes into consideration both the “what” (ability to meet financial targets) and the “how” (how these targets are achieved). There is a systematic framework to assess and align staff’s behavior and conduct with the values espoused by the organization and to send a strong signal on the importance of ethical conduct vis-à-vis financial targets.
  • Remuneration frameworks adequately consider behavioral and conduct factors, in addition to financial targets. In other words, staff’s behavior and conduct have a strong and "impactful" influence on their remuneration.
  • Ethical behavior that considers customer interests and demonstrates prudent-risk taking is actively promoted and celebrated. Concurrently, there are clear frameworks and processes to deter staff from, and hold them accountable for, misconduct through disciplinary actions and compensation adjustments.

MAS expects banks to benchmark themselves against the desired outcomes set out in the paper. Banks should assess the ability of its internal controls and processes to achieve these outcomes effectively and take steps in a risk-appropriate manner to address gaps, if any. Banks have the latitude to explore different means of achieving the desired outcomes, taking into account their specific organizational structure, business model, and risk profile. In addition, while this information paper is based on the MAS’s thematic inspections of banks, the desired outcomes and good practices are relevant and applicable to insurance companies as well. Insurance companies should, therefore, incorporate lessons from this paper in a risk-based and proportionate manner, giving proper regard to the profile of their business activities and customers.

 

Keywords: Asia Pacific, Banking, Insurance, Incentive Structures, Corporate Governance, Proportionality, Conduct Risk, Remuneration, Operational Risk, MAS

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