March 08, 2019

FSB published the key takeaways from its workshop with banks, on implementation of the international standards on compensation. The workshop was held in London in October 2018. Feedback on the topics discussed at the workshop can be provided by May 07, 2019.

The following are the key topics covered in the workshop in relation to the actions being taken by banks:

  • Compensation issues such as the post-crisis change in compensation structures. The changes were most pronounced in the European Union and United States and, in general, in jurisdictions where the dialog with supervisory authorities on compensation policies and practices is continuous.
  • Practical steps taken to implement reforms on compensation practice, including details on which individuals are designated as material risk-takers. Many banks noted that the process for identifying material risk-takers has become more structured and consistent across businesses and between banks, partly as a result of the increased regulatory and supervisory guidance.
  • Steps taken to assess effectiveness of the current compensation policies and practices. Banks are increasingly considering the effectiveness of their compensation regimes; however, finding the right metrics and process for these reviews is not simple
  • Increased focus on conduct risk. Several banks emphasized that there had been a fundamental shift toward incentivizing and rewarding positive behaviors, while embedding the conduct agenda at every level of the employee population. A number of banks cited the importance of having management accountability in place so that, where appropriate, compensation actions can be taken against senior management that were accountable for the relevant business. 
  • Use of technology to ensure effectiveness. A limited number of banks reported increased use of technology as part of efforts to ensure the effectiveness of compensation regimes. This included algorithms for identifying outliers, plus back-testing and regression analysis.

As part of its work to monitor implementation of its Principles for Sound Compensation Practices and their Implementation Standards, FSB engages regularly with firms across financial sectors to assess the extent to which the standards have been effectively implemented.  and challenges and inform the FSB’s biennial progress report on compensation practices. Executives responsible for managing processes related to compensation at 17 large internationally active banks and officials from the FSB Compensation Monitoring Contact Group participated in the workshop. The developments at the workshop will be used as input into the biennial compensation progress report of FSB. This report will be published later in 2019.

 

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Keywords: International, Banking, Conduct Risk, Compensation Practices, Governance, Operational Risk, FSB

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