Community Corner

Range of Methodologies for Risk and Performance Alignment of Remuneration 



Executive summary 

A. Background and mandate 

1. In April 2009 the Financial Stability Board (FSB)1 published nine principles for the achievement of sound compensation practices for financial institutions, the aim of which were to ensure effective governance of compensation practices, alignment of compensation with prudent risk-taking, effective supervisory oversight and stakeholder engagement. The principles also aim to redress deficiencies in compensation practices that contributed to the global financial crisis that began in 2007. The FSB called for urgent action to address unsound compensation practices. Subsequently, in September 2009 the FSB introduced a set of standards that were designed to support the implementation of the principles. These were supplemented in January 2010 by an assessment methodology prepared by the Basel Committee on Banking Supervision2 to assist prudential supervisors in taking action. 

2. Following a Peer Review of the implementation of its Principles for Sound Compensation Practices and Implementation Standards3 conducted in the first quarter of 2010, the FSB noted that good progress had been made in areas related to governance, oversight and disclosure, but that further work was needed to raise the standard of risk adjustment to remuneration. Ensuring that performance-based compensation is adjusted to account for potential risks is essential to the successful implementation of the FSB remuneration principles and standards. 

3. Given the competitive challenges in the industry and also the practical issues faced by institutions, the FSB noted in its peer review report that “supervisors (…) should support at the technical level the development of sound practices on risk adjustment” and accordingly made the following recommendation: 



Basel Report Risk Methodologies May 2011 def.pdf270.84 KB

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