FRM Part I · FRM Exam Part I · The Governance of Risk Management
Which compensation design best supports good risk governance at a financial institution?
Risk-adjusted variable pay with deferral and clawback provisions best supports risk governance, because it ties rewards to long-term outcomes and penalizes later losses. Revenue-only, guaranteed or immediately paid bonuses encourage short-term risk-taking with no accountability for downstream consequences.
- AVariable pay that is risk-adjusted, with a portion deferred and subject to clawback if losses emerge laterCorrect
- BAnnual cash bonuses based solely on current-year revenue
- CFully guaranteed bonuses for traders regardless of risk taken
- DBonuses paid immediately and in full when a trade is booked
Explanation
Risk-adjusted, deferred and clawback-eligible pay aligns incentives with long-term performance and discourages excessive risk-taking. Pay linked to revenue alone, or paid immediately or guaranteed, rewards short-term risk-taking without accountability.
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