Reforming bank compensation practices that have been blamed for contributing to the global financial crisis remains a work in progress, according to a new report.

The report, published Friday by the Institute of International Finance and consultancy Oliver Wyman, finds that “significant progress” has been made on compensation reform. But that reform remains “in many ways a work in progress”.

“Financial institutions have more work to do to fully address some remaining weaknesses — for example in the area of risk adjusted bonus calculation over a time horizon — and regulators need to sustain the efforts to stabilize regulatory frameworks and address issues of consistency of regulatory implementation,” it said.

The report found that good progress has been made in improving governance within firms, although there is more work to be done. And, it said that many firms have made changes to payout structures, using more deferred compensation and non-cash instruments.

However, it also says that there has been only limited progress at enhancing disclosure. “A significant majority of banks” remain short of the international standards for improved disclosure, it found, “with less than half of survey participants disclosing information on bonus pool sizing and allocation, and on their methodology for determining individual compensation of highly paid employees.”

Banks also need to make more of an effort to improve the way they determine and allocate bonus pools to take greater account of risk-adjusted profitability, the report said. Additionally, they need to do more to expand the range of factors that are used to assess performance, it advised.

The biggest ongoing challenges to reform identified in the survey include: the alignment of deferral time horizon to the risk horizon of businesses, the measurement of risk and incorporation into the compensation process and the use of clawback clauses. Also, the largest general challenge to reform, reported by survey respondents, was the lack of regulatory consistency facing crossborder firms. “These challenges confirm that compensation reform is still work in progress and that further change is needed,” the report concludes.

“This report documents the important changes the financial services industry has made in its compensation practices since the onset of the crisis. However, more has to be done by those of us in the industry, and the IIF will continue to monitor performance in this area,” said Rick Waugh, president and CEO of Bank of Nova Scotia, and co-chair of the IIF Steering Committee on Implementation.

“We are seeing greater emphasis to ensure that incentives are linked to performance and are aligned with shareholder interests. Importantly, we do not see this as restricting the level of compensation, but that banks adopt policies to ensure that incentives do not induce risk-taking in excess of the firm’s risk appetite,” he added.

IE