FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure
A risk manager reviewing a firm's culture finds that traders who exceed limits but earn large profits are promoted, while those who report near-misses are viewed as unproductive. Which action would most directly address the root cause?
Aligning compensation and promotion with risk-adjusted performance and rewarding transparent risk behavior addresses the root cause, because incentives shape culture. Adding limits or weakening risk independence would not change what employees see being rewarded.
- AIncrease the number of VaR limits on each desk
- BAlign compensation and promotion criteria with risk-adjusted performance and recognition of good risk behaviorCorrect
- CMove the risk function to report to the head of trading
- DReplace the risk appetite statement with a longer document
Explanation
Culture is driven by incentives and what is rewarded. Linking pay and promotion to risk-adjusted outcomes and rewarding escalation changes behavior. More limits do not fix incentives, and reporting to trading weakens independence.
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