Basel Committee publishes assessment methodology for compensation practices

Basel Committee publishes assessment methodology for compensation practices
BIS January 22, 2010

The Basel Committee on Banking Supervision today issued Compensation Principles and Standards Assessment Methodology. The Methodology seeks to foster supervisory approaches that are effective in promoting sound compensation practices at banks and help support a level playing field.

Mr Fernando Vargas, Chairman of the Basel Committee's Task Force on Remuneration and Associate Director General of Banking Supervision at Bank of Spain, explained that "the Methodology provides a comprehensive set of tools for supervisors to assess compensation practices in an effective and consistent manner."

The Methodology will help supervisors assess a firm's compliance with the Financial Stability Board's "Principles for Sound Compensation Practices" and related implementation standards. This will contribute to ongoing implementation of the Principles and Standards, including the FSB’s current thematic review of national and firm implementation. Consistent with the FSB "Principles for Sound Compensation Practices", the Methodology is structured based on the following themes:

1. Effective governance of compensation
2. Effective alignment of compensation with prudent risk taking, and
3. Effective supervisory oversight and engagement by stakeholders.

Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, stated that "use of the Methodology will promote appropriate compensation practices that create the right incentives for effective risk management and avoiding excessive risk-taking." He noted that "the Basel Committee's work on compensation issues is ongoing. It is likely that the Methodology will expand and change over time as more practical experience is gained."