Bank boards are more active in overseeing executive compensation, and a broader range of units within banks have input into compensation, according to a progress report released today by the Basel, Switzerland-based Financial Stability Board. Human resources remains in a key role, but compliance, risk management and other control functions are involved in making compensation decisions. Compensation arrangements also have longer time horizons and include mechanisms like clawbacks to align compensation with risk management priorities, the FSB said.
“The next challenge is developing frameworks for assessing the effectiveness of compensation policies and practices in balancing risk and reward,” the FSB added. “Banks indicate that it is vital for the banking industry to continue to be competitive with new digital and technological challengers, and attracting and retaining talent is a key factor in remaining both competitive and profitable.”
The report focused on the practices of the largest worldwide banks—in the U.S., the eight global systemically important banks—that are subject to domestic regulators’ implementation of the FSB’s principles and standards for compensation. “[B]anks are putting a particular focus on steps they can take to reduce misconduct,” the FSB noted, in light of the growing significance of conduct risk and supervisory attention to it.