Risk and Governance
First published:
ISBN: 9781782723271
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Executive Compensation: Performance, Regulation and Ethics
Introduction: The Confluence of Risk and Governance
Corporate Governance, Information and Control
The Nature of Corporate Governance in Banking
Regulation and Governance
The Centrality of Risk Management
The Mission, Organisation and Governance of Risk Management
A Cartography of Banking Risks
Operations Risk in Extreme Market Conditions
Managing Legal Risk
Managing Reputation Risk
Drawing Boards: Motivations and Responsibilities in the Boardroom
Executive Compensation: Performance, Regulation and Ethics
Fair Value, Auditing and Internal Controls
Risk Management and the Role of Culture
The Board of Directors
Compensation
Auditing, Reporting and Disclosure
Blaming compensation practices (and human greed) for failures in the financial system has always been commonplace. However, it is worth examining the underlying reasons for the compensation model prevailing in banking organisations. Does it serve the purpose of enhancing the organisation’s performance, and is there perhaps a better one that could be used? This chapter will examine the structure of executive compensation in banks, its motivations and proposed improvements, as well as reviewing the available empirical evidence and the key regulatory recommendations. It will also suggest that, precisely because banks play such a pivotal role in our social and economic system, we should not shy away from asking such questions in terms of ethics and fairness.
COMPENSATION AND PERFORMANCE
Executive compensation is the financial compensation received by an officer of a bank, and is usually structured along two sets of dimensions: fixed and variable; short-term and long-term. Fixed compensation comprises basic salary, guaranteed and sign-up bonuses, pension, insurance and other fringe benefits not related to performance. The variable component of compensation takes the form of
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