RETURN AND REWARDS

Next important issue that warrants a really careful consideration is the issue of executive compensation.

How much compensation is too much?

Can the industry have a different kind of compensation structure for the same job?

Can there be uniform board level accountability?

Flawed incentive compensation practices in the financial sector were one of the important factors contributing to the recent global financial crisis.

I am aware that booms are propelled by greed and busts are born out of fear.

This quirk of human nature will always ignite the euphoria that fuels the ups and exacerbates the downs.

Employees were too often rewarded for increasing the short-term profit without adequate recognition of the risks the employees’ activities posed to the organizations.

These perverse incentives amplified the excessive risk taking that severely threatened the global financial system.

The compensation issue has, therefore, been at the centre stage of the regulatory reforms.

Issue of appropriate compensation commensurate with risk or built-in checks to avoid excessive risk taking would have to be managed through a sound corporate governance framework based on strong corporate ethics principles and with reference the principles laid down by Financial Stability Board (FSB).

The principles are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes.

The principles call for effective governance of compensation and its alignment with prudent risk taking and effective supervisory oversight and stakeholder engagement.

The principles have been endorsed by the G-20 countries and the Basel Committee on Banking Supervision (BCBS) and are under implementation across jurisdictions.

However, banks and other financial system players need to appreciate that good governance is more a matter of practice rather than a matter of compliance.