FSB Reviews Progress on Implementation of Sound Compensation Practices
The Financial Stability Board (FSB) published a progress report on the implementation of its principles for sound compensation practices and their implementation standards in financial institutions. The report covers practices of the largest financial institutions in the banking, insurance, and asset management sectors. It highlights uneven progress toward implementing the principles and the standards, with banks relatively more advanced than insurance and asset management firms. This likely reflects the more pressing need for banks to align compensation with risk-taking, following the 2008 global financial crisis.
Against this backdrop, the report focuses on:
- The effectiveness of compensation frameworks. A common approach to assess employee performance and determine variable compensation is to use a balanced scorecard based on key performance indicators, complemented by other inputs. The report notes that it is critical to establish and apply such a framework to promote a sound risk culture in a firm. While in-year adjustments and malus are commonly used, the use of clawback is not widespread due to ongoing legal and practical constraints. The report advocates incorporating clawback terms and severance clauses in employment contracts to enhance their enforceability and effectiveness.
- Emerging trends. Non-financial measures and disclosure of compensation-related information are increasingly used to shape and promote a sound risk culture and positive behaviors, as well as to contribute to robust risk management. Firms are increasingly incorporating environmental, social, and governance (ESG) aspects to drive accountability for delivering outcomes. This must be underpinned by robust governance, as the increasing application of non-financial measures requires the Board and internal control functions to use discretion and judgement appropriately.
- Experience during the COVID-19 pandemic. The report finds that most existing compensation frameworks, and associated governance mechanisms, have demonstrated sufficient flexibility to date. However, while banking authorities in most jurisdictions have powers to direct firms to hold back and/or limit bonuses, especially in cases where there are concerns about capital conservation, or to increase deferral periods, this is much less prevalent in the asset management and insurance sectors.
Related Links
Keywords: International, Banking, Insurance, Securities, Compensation Practice, Remuneration, Governance, ESG, COVID-19, Operational Risk, FSB
Featured Experts

Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Related Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
UK Authorities Issue Regulatory and Reporting Updates for Banks
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
BaFin Consults on Resolvability Requirements for Resolution Planning
The Federal Financial Supervisory Authority of Germany (BaFin) proposed to amend the “Capital Investment Conduct And Organization Ordinance” and issued a draft circular on the minimum resolvability requirements for resolution planning.
EBA Consults on Certain Standards and Guidelines Under CRR and BRRD
The European Banking Authority (EBA) proposed guidelines, for the resolution authorities, on the publication of the write-down and conversion and bail-in exchange mechanic, with the comment period ending on September 07, 2022.
OJK Publishes Regulatory Updates for Financial Sector Entities
The Financial Services Authority of Indonesia (OJK) is strengthening cooperation with the Australian Prudential Regulation Authority (APRA) and the Japanese Financial Services Agency (JFSA)
EU Publishes Rules on DLT and Data Governance
The European Parliament and the Council published Regulation 2022/868 on European data governance (Data Governance Act).
EBA Publishes Phase 2 of Reporting Framework 3.2
The European Banking Authority (EBA) published phase 2 of its reporting framework 3.2. The technical package supports the implementation of the updated reporting framework by providing standard specifications