Architecture and compensation
How staff – from the CEO down to the trading floor – are remunerated is a major issue for financial institutions and should be addressed by the regulators, argues Ron Dembo. But can banks align compensation with accounting and economic capital?
Banks are faced with a significant challenge when it comes to measuring performance and finding an appropriate compensation mechanism that aligns all parties. First, the chief executive officer is measured on the performance of the bank’s stock price. The measures the market uses and the numbers the CEO watches closely are mostly accounting-based (backward looking). On the other hand, internally the bank is run on numbers that reflect economic capital, which in turn is risk-based (forward
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