14.1.1 Risk assessments

The investment firm should define the objectives of the investment firm, business units and staff. These objectives should be derived from its business and risk strategy, corporate values, risk appetite and long-term interests and consider also the cost of capital and the liquidity of the investment firm. The investment firms should assess the investment firm’s business units’ and identified staff members’ achievements during the accrual period against their objectives.

Investment firms should take into account all current and future risks, whether on or off-balance-sheet, differentiating amongst risks relevant for investment firm, business units and individuals. Though investment firms usually bear all types of risk at investment firm-wide level, at the level of individual identified staff members or business units only some types of risk may be relevant.

Investment firms should also use measures for risk alignment of remuneration where an exact quantification of the risk exposure is difficult, such as reputational and operational risk. In such cases the risk assessment should be based on suitable proxies, including risk indicators, capital requirements or scenario analysis.

In order to conservatively take into account all material risks at the investment firm and business unit levels, investment firms should use the same risk measurement methods as used for internal risk measurement purposes, e.g. within the internal capital adequacy assessment process (ICAAP). Investment firms should take into account expected and unexpected losses and stressed conditions.

The investment firms should be able to demonstrate to the competent authority how the risk calculations are broken down by business units and different types of risks. The extent and quality of methods and models used within the ICAAP should be reflected by the investment firm in a proportionate way in the remuneration policy.