WASHINGTON — A new report from the International Monetary Fund says tying executive compensation more closely to risk would curb the excess risk-taking that contributed to the global financial crisis.
The research, in the analytical chapters of the global financial stability report released Wednesday by the IMF, indicates that a bank’s risk-taking behavior currently has little bearing on executive compensation packages. In addition, bank creditors lack the incentives needed to monitor bank risk.
Since the financial crisis, average annual CEO compensation has recovered, and particularly in Europe, fixed pay has increased. However, the number of years it takes for compensation to fully vest is getting longer and shareholders are increasingly getting a vote on executive compensation, the IMF found.
The report recommends executive compensation should be more closely linked to the bank’s risk of defaulting – and the bank’s board of directors should be independent of bank management. The research indicates banks with this organizational structure tend to take less risk. In addition, risk committees would ensure such risk-taking practices were necessary and effective.
“Bankers should be rewarded for creating long-term value, not for short-term bets,” Gaston Gelos, chief of the Global Financial Stability Division at the IMF, said in a news release.
Compensation regulation would also include clawback provisions that would force bankers to return bonuses in the event management decisions incurred losses in the long term.
IMF researchers, compiling the report, used data from more than 800 financial institutions across 72 countries, covering commercial, corporate, savings, mortgage and investment banks.
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