FRM Part II · FRM Exam Part II · Risk Governance
A bank's board wants to strengthen its risk culture. Which of the following actions is MOST likely to reinforce desired risk-taking behavior across the organization?
Tying performance reviews and pay to compliance with risk limits and ethical conduct, not just revenue, best reinforces desired behavior. Incentives signal what the firm truly values, so aligning them with risk appetite shapes culture more than policies, revenue-only bonuses or sole reliance on the risk function.
- ALinking performance reviews and compensation to adherence to risk limits and ethical conduct as well as to revenue resultsCorrect
- BPublishing a detailed risk policy manual without changing how staff are evaluated
- CPaying bonuses solely on trading revenue to keep staff motivated
- DRelying on the risk function alone to enforce limits, with no role for front-line managers
Explanation
Culture is shaped by what is rewarded and tolerated. Incorporating risk and conduct measures into evaluation and pay aligns incentives with the risk appetite. A policy manual without changed incentives, or revenue-only bonuses, sends contradictory signals, and a risk function acting alone ignores first-line ownership.
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