Oliver Wyman, in collaboration with the IIF, has published a report on compensation reform, Compensation Reform in Wholesale Banking 2010: Progress on Implementing Global Standards. The findings of the report are based on the results of an in-depth survey of a sample of IIF member institutions.
The focus of the report is to provide the industry, regulators and the public with an overview of the industry's progress in applying the FSB Implementation Standards and compensation best practices. In addition, the report identifies areas where further work is needed, and highlights key industry challenges to further compensation reform.
The survey covers the following aspects of compensation:
Compensation Governance
- Increased mandate and level of activity of the Board-level remuneration committee
- Marked expansion of the role of the Risk function in compensation setting
- Disclosure as an area of limited improvement and where more effort is required by the industry, regulators and investors to ensure alignment
Bonus Pool Calculation and Funding
- Increased use of risk adjustment metrics in calculating the bonus pool. These frameworks remain only as good as the risk measurement methodologies.
- More effort is needed in technical areas, such as liquidity risk and incorporation of adjustments to reflect the likelihood/timing of future earnings
- Increased use of scorecards for individual bonus pool calculation, incorporating adherence to Risk policies
Payout Structures
- Increased prevalence of deferrals
- Increased use of performance dependent clawbacks/bonus malus mechanisms
- Multi-year guarantees and golden parachutes all but abolished
