Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices - The use of compensation tools to address misconduct risk
The Financial Stability Board (FSB) is established to coordinate at the international level the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. Its mandate is set out in the FSB Charter, which governs the policymaking and related activities of the FSB. These activities, including any decisions reached in their context, shall not be binding or give rise to any legal rights or obligations under the FSB’s Articles of Association.
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Foreword Since the publication of the FSB Principles and Standards on Sound Compensation Practices (P&S) in 2009, supervisors and firms have directed significant attention to improving compensation and related risk adjustment practices. The P&S note that compensation should be adjusted for all types of risk. They emphasise that subdued or negative financial performance of a firm should generally lead to a considerable contraction of a firm’s total variable compensation, taking into account both current compensation and reductions in payouts of amounts previously awarded, including through malus or clawback arrangements. Although the P&S do not specifically address the issue of misconduct risk or provide guidance on the operation of compensation tools in the event of misconduct, the role of compensation as an important influence on incentives is clearly recognised. This guidance does not propose a definition of misconduct and posits that each firm should internally define misconduct risk based on the firm’s characteristics and business and in a way that promotes adherence to legal, professional, internal conduct and ethical standards. |