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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

Which compensation design best supports a sound risk culture at an investment management firm?

Risk-adjusted bonuses with deferral and clawback support sound risk culture because they tie rewards to risk taken and conduct over time. Pay based only on gross returns or paid immediately encourages short-term risk-taking and fails to hold staff accountable for later losses.

  1. ABonuses adjusted for risk taken and compliance behavior, with deferral and clawback provisionsCorrect
  2. BBonuses based solely on current-year gross returns
  3. CFixed bonuses unrelated to either performance or risk behavior
  4. DBonuses paid fully in cash immediately after each quarter's results

Explanation

Risk-adjusted pay with deferral and clawback aligns employee incentives with long-term outcomes and discourages hidden or excessive risk. Return-only or immediate cash bonuses reward short-term risk-taking, and fixed pay disconnects reward from behavior entirely.

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