“Don’t do it, or else”
The world’s biggest banks and insurers are struggling to find ways to reward better risk management among senior executives, according to a new report.
Despite increased regulatory guidance and the ongoing impact of the financial crisis, the report reveals global bank and insurers are sticking with the stick method when it comes to encouraging good risk management among senior staff.
Penalising misconduct and non-compliance remain the number one method of instilling good practices, the pay and remuneration report from consultancy Mercer found.
Rewarding risk management, not risk taking
However, a more positive way of instilling sound risk-taking is to reward staff according to how well they manage risk. Dirk Vink, Mercer principal and financial services project manager, said: “We have concluded that the most positive impact on sound risk-taking behaviours and decision-making has come from significantly improved governance and increased involvement of risk management in the performance management and compensation process”.
Top financial services executives are on the whole not earning any less than before. While not coming down in value, bumper pay packages are becoming more transparent, with banks and insurers significantly increasing fixed pay, decreasing bonuses and (hoo-bloomin’-ray), increasing the emphasis on non-financial performance.
Vicki Elliott, Mercer senior partner and leader of the Global Financial Services Talent Network, says: “the focus for financial services firms is firmly on trying to set the right tone from the top with strong governance and high involvement of risk management. Overall, total compensation levels remain broadly the same compared to levels prior to regulated bonus caps. However, banks, particularly in Europe, have significantly increased fixed pay levels improving the certainty of pay delivered to key risk-takers.”
Which either means they get rewarded for risks regardless of whether they manage them well, or they are encouraged to take fewer risks because they won’t get a bonus, depending on how you look at it.