NEW YORK – Analysts are suggesting that the newest plans to further link pay and compensation at financial services firms to risk levels will face inherent limitations.
Such proposals are being made as Washington looks to potential regulations to help stave off another financial crisis. But analysts are saying that while it might make sense to introduce risk-weighted pay scales – so employees who take big risks in pursuit of those big bonuses face tougher performance hurdles than those who take less risk – this approach would have done little to rein in pay before the financial crisis because most banks’ models were so grossly underestimating the risks being taken.
Risk management "is not a silver bullet," Chris Thompson, who heads the financial services industry risk management practice at the consulting firm Accenture, told American Banker, an affiliate of Credit Union Journal. "It's one input into the performance management process."
The close relationship between institutional risks and employee rewards has helped give traction to ideas such as deferring larger portions of pay and measuring employees over longer periods to more fully reflect the consequences of their work, American Banker reported.
Bank supervisors no doubt are resting easier knowing that more banks these days are thinking about pay in the context of safety-and-soundness considerations. But they need not worry that their evangelizing on the issue will make banks so risk-conscious that regulation becomes redundant.
For one thing, according to Thompson, adoption of risk-based approaches to pay is happening unevenly across the industry. For another, the federal safety net underpinning the financial system skews the risk appetite for a crucial bank constituency: investors.
"Shareholders may at times be willing to tolerate a degree of risk in a firm's activities that does not fully reflect the costs of that risk to society as a whole," Fed Gov. Daniel Tarullo said in November at a University of Maryland roundtable discussion on executive pay. "Thus, even if banking organizations were able to achieve full harmonization of employee and shareholder interests in their incentive compensation arrangements, supervisory oversight would still be warranted."
