FSB published key takeaways from a workshop on the implementation of compensation reforms. The workshop was held in November 2019 with banks, insurance and asset management firms, trade associations, and academia. The workshop focused mainly on assessing the effectiveness of compensation policies, use of data by firms as part of the compensation practices, and legal and regulatory issues.
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. The objective of the workshop was to gather information on key compensation issues and challenges. The key workshop takeaways include the following:
- Risk alignment. All firms reported that they took steps to align compensation with risk. They also noted that, given the earlier regulation for banks in this area, banks are often more advanced on this work than firms in other parts of the financial sector. Firms expressed the view that efforts to prevent and address instances of misconduct mean that non-financial metrics play an increasingly important role in compensation schemes. They noted that the increased integration of social, economic, and governance (ESG) factors into compensation also present challenges in terms of measurement.
- Use of data. A number of firms reported improvements in systems and processes for gathering and analyzing compensation data. However, firms noted that such systems can often be complicated and expensive to implement, and are not always an investment priority for firms. In banks there appears to be a correlation between directors holding (and not frequently selling) shares and bank profitability. To align directors’ remuneration with the long-term interests of the firm, academic work suggests restrictions on equity for a longer period than their tenure should be considered.
- Effectiveness of compensation policies. Firms are at an early stage of developing frameworks to assess the effectiveness of their compensation policies and practices. Firms noted the importance of effective communication, with employees as an important factor in driving behavioral and cultural change.
- Governance. Firms reported that banks are at a more advanced stage than other firms in terms of embedding compensation decisions in their governance processes. However, most firms reported a greater focus on these issues at board level and the increased importance of firms’ compensation policies and practices for non-executive directors. Firms noted that, while there has been greater harmonization of compensation regimes in recent years, important differences (deferral requirements, bonus cap, and disclosure regimes) still exist. These differences continue to present practical difficulties in terms of designing and implementing consistent compensation policies across international groups.
- Compensation tools. Firms noted that the use of malus and clawback is limited because of both complexity and, in some jurisdictions, legal challenges. Firms noted that where malus or clawback is applied this is likely to have a significant negative impact on the career progression of the employee, and may make it less likely that they will be hired by another firm.
- Competition for talent. Firms noted that they face increased hiring challenges due to increased need to hire from other sectors where compensation structures are different; the extent to which financial services firms are no longer considered employers of choice; and the extent to which factors other than compensation now influence the decisions of prospective employees. Firms also reported difficulties transferring employees internally between jurisdictions due to compensation policies differing because of statutory and regulatory divergence.
Keywords: International, Banking, Insurance, Securities, Compensation Practices, Governance, ESG, Operational Risk, Remuneration, FSB
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