DCRO Issues Guiding Principles for Compensation Committees: Governing the Link Between Pay, Performance, and Risk

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An international group of board directors, chief risk officers, and other C-level executives has taken up the challenge of providing guidance to boards on how to best govern the link between pay, performance, and risk. Its report is released this week.

“This is a challenge to the status quo,” Koenig noted. He added that primarily, though, the guiding principles “have been written to be used as a practical tool for boards of directors to advance the sustainable pursuit of their stated goals and objectives.”

The Directors and Chief Risk Officers group (“the DCRO”) issued today its guidance to organizations seeking to better govern risk through the work of board Compensation (Remuneration) Committees.

As awareness of the link between incentives and employee behavior becomes more apparent, boards of directors have a responsibility to ensure that the proper risk-taking culture is being stimulated and not counteracted by the design of executive and employee incentive compensation plans that unintentionally encourage negative behaviors. The DCRO Guiding Principles for Compensation Committees were developed by an international group of active board directors and chief risk officers to assist organizations in their fulfillment of this key fiduciary duty.

“Incentive pay plans have long been known to incent both good outcomes and misdeeds,” said David R. Koenig, Founder of the Directors and Chief Risk Officers Group and a member of the DCRO Compensation Committee Risk Governance Council. “These Guiding Principles have been written so that organizations can more effectively govern the risks of incentive pay, steering behaviors towards positive outcomes.”

The DCRO Guiding Principles for Compensation Committees challenge the status quo, serving as a practical tool for boards of directors to advance the sustainable pursuit of their stated goals and objectives and as a guide for investors and regulators in their ongoing assessments of risk governance in all kinds of institutions.

The DCRO Guiding Principles for Compensation Committees are freely available for download.

An extended article regarding the Guiding Principles and the work of the governance council, including additional quotes from council members, may be downloaded here.

About the Directors and Chief Risk Officers group - The DCRO is an informal network of more than 2,000 board directors, chief risk officers, and other c-level executives from more than 115 countries, whose work involves the governance of risk-taking. Group members develop and share best practices around risk governance across industries and geographical regions. At the core of DCRO work are a series of Guiding Principles developed by collective effort of DCRO Governance Councils. For information about the DCRO, please visit http://www.dcro.org or contact us at [email protected]

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