While Evolving, Risk and Compensation Linkages Need Further Strengthening Across Financial Services: Deloitte's Latest Risk Management Survey

NEW YORK, Feb. 17, 2011 /PRNewswire/ -- With financial regulators devoting a great deal of focus on pay and bonus practices globally – and new rules in this area being proposed in the U.S. – a new survey from Deloitte finds that 37 percent of financial institutions reported that they had completely or substantially incorporated risk management considerations into their overall performance goals and compensation decisions.

"While we saw an uptick in risk-based compensation practices, it was mostly at the senior management level," said Edward Hida, the editor of the report and Global Leader - Risk & Capital Management, Deloitte Touche Tohmatsu Limited.  

"It is even more important that financial institutions take risk management into account in performance evaluations and incentive compensation across the organization," said Hida. "Because of all of the attention the issue has received around the globe - there is considerable work to be done here."

Similarly, the survey finds that while many institutions have adopted some of the specific changes recommended by regulators and others to better integrate risk management into incentive compensation, further work remains. Among senior management, 64 percent of institutions sought to balance their emphasis on short-term versus long-term incentives, 57 percent paid their incentive in company stock, and about half (52 percent) deferred payouts linked to future performance.

However, less than a third of institutions (31 percent) matched the timing of payouts to senior executives to the term of the risks involved, and 26 percent had instituted "clawback" provisions.

Also, four out of five institutions (82 percent) reported that they required that a portion of the annual incentive be tied to overall corporate results.

The seventh edition of the report, titled "Navigating in a Changed World," surveyed chief risk officers – or their equivalent – from 131 financial institutions from around the world, with aggregate assets of more than $17 trillion and representing a range of financial services sectors including banks, insurers and asset managers.

Among other major findings in the survey:

• While the majority considered their institution to be either extremely or very effective in risk management overall, one-third of survey participants graded themselves below that level.
• Not only is the chief risk officer (CRO) role more prevalent at financial institutions, but he or she is reporting to higher levels in the organization. According to the survey, 86 percent of institutions had a CRO in place, up from 73 percent in 2008, and reports to the board level or to the CEO (or both) at 85 percent of institutions. In addition, they are playing a more strategic role.
• More institutions have adopted enterprise risk management (ERM) programs -- 79 percent of institutions reported having a program or equivalent in place or in progress, an increase from 59 percent in 2008.
• While the value of ERM has increased, so have the challenges of implementing the information and technology infrastructures to support a comprehensive program; the importance of information and technology management in effective risk management has only been emphasized by the events of the global financial crisis.
• The top-rated risk management technology challenge among those surveyed was integrating risk data across the organization, which was rated as an extremely or very significant issue by 74 percent of executives.
• More than 80 percent of institutions experienced significant impacts from regulatory changes in the countries where they operate; at 40 percent of responding institutions, these impacts included the need to maintain higher capital levels and the need to maintain higher liquidity ratios.

Deloitte's study also indicates that financial institutions may need their risk management programs to have greater flexibility to adapt to new business models and changing regulatory requirements.

"During the last few years, risk management assumptions and methods have been challenged as never before, and will be facing even more rigorous requirements in the future," said Hida. "Regulators have numerous risk-focused efforts on the horizon including Basel III, systemic risk initiatives and various implementation efforts related to Dodd-Frank Act. As a result, many institutions have – and are – strengthening their risk management governance models, and there is likely to be a continued focus on enhancing risk management data and analytics capabilities. This is a very busy time for risk managers at financial institutions."

The report can be found online at www.deloitte.com/fsiglobalrisksurvey.

"Deloitte" as used in this press release means Deloitte Touche Tohmatsu Limited.

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SOURCE Deloitte Touche Tohmatsu Limited