Risk Management/Audit and Executive Compensation
Have you successfully implemented changes to your organization's compensation plans to align with your corporate risk objectives?
- Claw-backs for executives (as in the case of Wells Fargo Consumer Banking Division)
- Increases in bonuses for improved risk management practices?
- Bonuses to front-line employees for "doing the right thing"?
In a word - yes. But something as complex as remuneration can't be unidimensional. So yes - whilst I have adjusted two organisational Remuneration systems that have an element of risk measurement in them, it has not been the sole focus.
In in both cases, we were trying to achieve several goals, not just risk identification, mitigation, or decision making. But understanding that taking some risk, if executed properly can lead to positive outcomes.
I have also implemented a third Remuneration system that was primarily focused on VaR changes over time, as the determiner of the performance pay pool.
My preference is to reward positive behaviours and outcomes, rather than punish behaviours like claw-backs. And, there will quite a different conversation if staff are caught doing the wrong thing, it won't be about performance pay.
Most employees have annual goals based on the financial results and related the predicted environment. This includes total market, must-win projects, execution of business. The quality of execution includes a proper risk management. So even if not directly, risk management is included in the annual goals; as the better this is done, the more favorable the company's results and higher the annual bonus.
"Doing the right thing" is part of the company's code of conduct and a basic requirement of the employee. Even if this is, of courses, more easy said than done, it should not be included in the annual bonus. It can be discussed that employees, who in one situation, walked the extra mile, can receive a recognition. Such a system is often includes in the HR-processes. The other way around, "not doing the right thing" has to negatively affect the annual bonus.