FRM Part II · FRM Exam Part II · Integrated Risk Management
A firm's board risk committee notices that business heads are paid bonuses based solely on revenue, and several have repeatedly operated near the edge of their limits. Which governance improvement most directly addresses the underlying issue in line with sound risk culture?
The firm should incorporate risk-adjusted performance and adherence to risk appetite into compensation. Revenue-only bonuses encourage managers to push limits, so aligning incentives with risk behavior fixes the root cause, whereas more reports, fewer limits or weaker risk-function independence would not.
- AIncrease the frequency of risk reports sent to the audit committee
- BIncorporate risk-adjusted performance and adherence to risk appetite into compensation decisionsCorrect
- CReduce the number of limits so fewer breaches are recorded
- DMove the risk function to report to the head of the largest business line
Explanation
Incentives driven only by revenue encourage risk-taking at the limit edge. Aligning compensation with risk-adjusted results and appetite adherence reinforces risk culture. More reporting does not change incentives, fewer limits hides issues, and subordinating risk to a business line weakens independence.
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