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Make risk management part of your remuneration plan

Eleftherios Tsintzas (lefti4@yahoo.com) is the Deputy Audit Division Director at Alpha Bank Romania in Bucharest, Romania.

Providing generous bonuses to managers of financial organizations for achieving the desired short-term results was among the main factors contributing to the 2007 financial meltdown. At the time, most boards of directors considered remuneration policies (known also as compensation policies) as being unrelated to risk management. Moreover, boards were focusing only on the remuneration of the senior executives of their organizations.

Following the financial crisis, however, the remuneration-related regulatory requirements and best practices applicable to financial services organizations (many of them once thought of as “too big to fail”) have become increasingly demanding, aiming for effective governance of remuneration policies, the alignment of those policies to risk management, and increased engagement of stakeholders.

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