Basel Committee issues report on aligning remuneration with risk and performance

Basel Committee on Banking Supervision issued the final version of its report on the Range of Methodologies for Risk and Performance Alignment of Remuneration on 12th May 2011.

The report is intended to enhance banks’ and supervisors’ understanding of risk-adjusted remuneration. By providing clarification on the design of risk-adjusted remuneration schemes, the Committee aims to promote greater adoption of sound compensation practices in the banking sector. The report was first issued for consultation in October 2010. Comments received were supportive of the Committee’s objective to promote better methodologies to align remuneration with risk and performance.

In practice, the idea that an employee's compensation should take account of the risks that employees take on behalf of their organisation has proven to be challenging to implement. The report looks at various factors banks should take into account to incorporate risk and performance into bonus pools and individual compensation. It discusses the methodologies that promote sound incentives and which are used to adjust remuneration ex ante (eg through appropriate indicators and measures) or ex post (eg deferred compensation or clawbacks).

The report focuses on practical and technical issues that may reduce the effectiveness of the risk adjustment process. These include a lack of integration of remuneration processes into a bank’s overall risk management framework, the use of performance measures that do not fully capture risks or the use of adjustments not sufficiently tailored to employees’ seniority and activity.

By providing clarification on the design of risk-adjusted remuneration schemes and by highlighting issues that may affect the effectiveness of the risk adjustment methodologies, the Committee expects the report will help support and facilitate the broader adoption of sound compensation practices in the banking sector. .

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