ABSTRACT
Many risk management disasters have been caused by, or exacerbated by, poorly designed systems for reward and accountability. Performance measures can encourage short-term focus and the criteria designed to encourage risk compliance can often be gamed/faked. Executive accountability for risk is often non-existent because executives claim ignorance or hide behind group-decision-making processes, as in the recent Rio Tinto scandal.
This chapter investigates our current knowledge in this area and explores some of the major controversies of executive compensation e.g. pay/performance sensitivity, relativities between senior executives and front-line employees, the use of non-financial measures to determine performance. This chapter will be extremely helpful for those on remuneration committees because it examines the various components of executive compensation and how these might influence behaviour. Another feature of the chapter is the discussion of novel initiatives in the UK and elsewhere to regulate executive accountability.
