Skip to content

FRM Part II · FRM Exam Part II · Risk Governance

A bank's CRO proposes that the head of the risk function have compensation determined mainly by the profitability of the business lines she oversees. Which assessment is MOST consistent with sound governance practice?

This is inappropriate because tying the CRO's pay to the profitability of the businesses she oversees creates a conflict of interest and undermines the independence of the risk function. Control staff should be compensated based on achieving their control objectives, independent of business-line results.

  1. AIt is inappropriate because it compromises the independence of the risk function; risk staff pay should be independent of the performance of the businesses they monitorCorrect
  2. BIt is appropriate because it aligns risk staff with business goals
  3. CIt is appropriate because it ensures the CRO understands revenue pressures
  4. DIt is inappropriate only if the bonus exceeds base salary

Explanation

Independence requires that risk and control staff be rewarded for the quality of their control work, not for business-line profits that they must challenge. Linking pay to profitability creates a conflict of interest. The ratio of bonus to salary is not the core issue.

Did you get it right without looking?

One question tells you little. A timed set on Risk Governance shows your real accuracy, how long you take and where you lose marks.

Practise Risk GovernanceFree diagnostic mock

More Risk Governance questions