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FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

A company's management is rewarded solely on revenue growth, and it expands rapidly into riskier lending segments without adjusting capital. Which ERM weakness does this most directly illustrate?

This illustrates misalignment between incentives and risk appetite. Paying managers only for revenue growth rewards them for taking more risk, while the capital and risk costs are not charged to them, so the firm drifts beyond its intended risk appetite.

  1. AMisalignment between incentives and risk appetite, encouraging excessive risk-takingCorrect
  2. BExcessive reliance on diversification
  3. COverly conservative risk limits
  4. DA failure of model validation in market risk only

Explanation

Rewarding revenue alone without regard to risk encourages taking risk beyond appetite, since managers capture upside without bearing the cost of added risk. The scenario does not describe conservative limits or diversification, and nothing points solely to model validation.

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