Introduction [In April 2008, the Financial Stability Forum (FSF) recommended that “regulators and supervisors work with market participants to mitigate the risks arising from remuneration policies.” The FSF formed a Compensation Workstream Group in late 2008 with a mandate to draft sound practice principles for large financial institutions.]
Compensation practices at large financial institutions are one factor among many that contributed to the financial crisis that began in 2007. High short-term profits led to generous bonus payments to employees without adequate regard to the longer-term risks they imposed on their firms. These perverse incentives amplified the excessive risk-taking that severely threatened the global financial system and left firms with fewer resources to absorb losses as risks materialised. The lack of attention to risk also contributed to the large, in some cases extreme absolute level of compensation in the industry.
These deficiencies call for official actio
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