31 March 2009

IIF report on compensation structures in financial services

The report tries to identify the structural weaknesses in current industry compensation models and investigates the changes needed. The report, furthermore, evaluates to what extent the industry has already started to implement these changes.

The IIF released a report on compensation practices of financial services firms. The report found wide agreement that compensation incentives should not induce risk-taking in excess of the firm's own risk appetite, and significant support for the view that compensation should include a component reflecting the firm's overall results in line with sound risk management and business goals.

 

The report tries to identify the structural weaknesses in current industry compensation models and investigates on the changes needed. The report, furthermore, evaluates to what extent the industry has already started to implement these changes.

 

The IIF states that firms should:

Ø       Incorporate adjustments for risk in performance measurement.

Ø       Measure performance over a multi-year period where appropriate.

Ø       Defer compensation delivery in businesses that have a multi-year risk time horizon.

Ø       Pay compensation in units with value that is linked to the individual’s future performance (i.e. company stock may not always be the best currency) thus focusing deferrals on alignment with performance development over time rather than on retention.

 

Sections one and two of the report introduce the compensation debate and present the industry’s self-assessment against the IIF’s compensation principles. Section three examines industry compensation practices, delving deeper into key topics that the industry identifies as major areas for change. Section four discusses ways to overcome a number of obstacles that firms expect to face when changing their compensation schemes.

 

Press release

IIF - Oliver Wyman Compensation Report (.pdf)

 

© IIF - Institute of International Finance