Link bankers' pay to risk outcomes: Bank for International Settlements

GENEVA: To curb excessive risk-taking, banks need to put in place strict executive compensation norms where payout schedules are linked to risk outcomes over a multi-year horizon, says Bank for International Settlements.

BIS, the global grouping of banking regulators, has emphasised that compensation of bank executives should reflect risk-taking and risk outcomes.

Excessive risk-taking ways fuelled by exorbitant pay packets has been seen as a significant factor that led to the 2008 financial meltdown.

The latest suggestions from the BIS, through its detailed report on 'corporate governance principles for banks', also comes at a time when global financial sector continues to see challenging times amid persisting economic uncertainties.

"Banks have to set specific provisions for employees with a significant influence on the overall risk profile, so-called material risk-takers. Remuneration payout schedules should be sensitive to risk outcomes over a multi-year horizon," BIS said.

Noting that remuneration structure should be in line with the business and long-term interests of the bank, the report stressed there should also be measures in place to prevent conflict of interest.

"Remuneration programmes should encourage a sound risk culture in which risk-taking behaviour is appropriate and which encourages employees to act in the interest of the company as a whole (also taking into account client interests) rather than for themselves or only their business lines."

"In particular, incentives embedded within remuneration structures should not incentivise staff to take excessive risk," it said.

According to BIS, the remuneration framework should provide for variable pay to be adjusted with a full range of risks, including breaches of risk appetite limits.

"Practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain should be carefully evaluated by means of both qualitative and quantitative key indicators," said the report released recently.

Among others, BIS has delved into aspects related to board of directors' role in overseeing the implementation of effective risk management systems.

The report also underlined the importance of the board's collective competence as well as the obligation of individual board members to dedicate sufficient time to their mandates and to keep abreast of developments in banking.