14. Risk alignment process

The risk alignment process includes the performance and risk measurement process (section 14.1); the award process (section 14.2); and the pay-out process (section 15). At each stage of the risk alignment process, the variable remuneration should be adjusted for all current and future risks taken. An investment firm should ensure that incentives to take risks are balanced by incentives to manage risk.

An investment firm should align the time horizon of the risk and performance measurement with its business cycle in a multi-year framework. Investment firms should set the accrual period and the pay-out periods for remuneration at an appropriate length, differentiating between remuneration that should be paid upfront and remuneration that should be paid after deferral and retention periods. The accrual and pay-out periods should take into account the business activity and position of the category of identified staff or in exceptional cases of a single identified staff member.

Within the risk alignment process, an appropriate combination of quantitative and qualitative criteria in the form of absolute and relative criteria should be used at all stages to ensure that all risks, performance and necessary risk adjustments are reflected. Absolute performance measures should be set by the investment firm on the basis of its own strategy, including its risk profile and risk appetite. Relative performance measures should be set to compare performance with peers, either ‘internal’ (i.e. within the organisation) or ‘external’ (i.e. similar investment firms). Quantitative and qualitative criteria and the applied processes should be transparent and predefined as much as possible. Both quantitative and qualitative criteria may partly rely on judgement.

Where judgemental approaches are used, investment firms should ensure a sufficient level of transparency and objectivity when judgements are made by:

• a. setting a clear written policy outlining parameters and key considerations on which the judgement will be based;
• b. providing clear and complete documentation of the final decision regarding the risk and performance measurement or applied risk adjustments;
• c. involving relevant control functions;
• d. considering the personal incentives of the staff making the judgement and any conflicts of interest;
• e. implementing appropriate checks and balances, including, for example, making such adjustments within a panel involving staff from business units, corporate and control functions, etc.;
• f. approving the assessment made by a control function or at an appropriate hierarchical level above the function making the assessment, e.g. at the management body in its management or supervisory function or at the remuneration committee.

Investment firms should make the risk alignment process transparent to identified staff, including any elements that are based on judgement rather than objective facts or data.

Investment firms should provide detailed information to the remuneration committee or to the supervisory function if the final outcome after applying judgemental measures is significantly different from the initial outcome using predefined measures.