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FRM Part II · FRM Exam Part II · Integrated Risk Management

A firm wants to strengthen risk culture after a failure in which a business line concealed a growing exposure. Which action is most likely to improve early escalation of emerging risks?

Protected escalation channels combined with performance and pay assessments that reward good risk behavior best improve early escalation. They remove fear of retaliation and align incentives with transparency, whereas revenue-only bonuses, weakened independence or less board reporting would encourage concealment and reduce oversight.

  1. ATie bonuses solely to revenue so that business lines are motivated to manage their own exposures
  2. BCombine risk and compliance reporting lines into the largest revenue-producing division
  3. CEstablish protected escalation channels and include risk-behavior criteria in performance and compensation assessmentCorrect
  4. DReduce the frequency of risk reporting to the board to avoid information overload

Explanation

Protected channels reduce fear of retaliation, and linking compensation to risk behavior aligns incentives with transparency. Revenue-only bonuses encourage concealment, placing risk under revenue lines weakens independence, and less reporting reduces visibility.

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