The Institute of International Finance, a global banking industry lobby group, says that financial firms are making significant progress on reforming their compensation schemes to take account of risk.

The IIF board Wednesday reiterated its commitment to the Financial Stability Board principles and noted that firms are making substantial progress to adapt their compensation structures to follow the FSB principles by adjusting for risk and the cost of capital, including redesigning policies to defer a substantial portion of employee bonuses, and to introduce clawback provisions. Additionally, the IIF says that firms have made substantial improvements in their governance of compensation processes.

“Reform of compensation has been a clear necessity to correct poorly structured incentive compensation at many firms, which was weighted toward short-term results and insufficiently sensitive to underlying risks,” the board said in a statement.

It noted that following the FSB principles to improve compensation structures “addresses the root causes of misaligned incentives and will influence firm behavior positively. Reforming compensation structures is the right thing to do to serve our shareholders, reduce imprudent risk taking, and promote stability and resilience in the financial system.”

The board also called on regulators and policymakers to establish effective monitoring and implementation mechanisms to ensure that compensation structured to meet the FSB principles “is consistently applied across the relevant jurisdictions so as to create a level playing field in the global financial market.”

IE