Lost in Implementation: The Rise and Value of the FSB Principles for Sound Compensation Practices at Financial Institutions

Abstract

We analyse the principles for sound compensation practices at financial institutions and their implementation standards (briefly PSSCPs) issued in 2009 by the Financial Stability Board (FSB). We examine, first of all, the political economy of the PSSCP. We describe their formation as a result of the recent financial turmoil, and the way in which a sound compromise between the different interests at stake was reached at G20 level, with the contribution of the FSB. We then consider the roots of the PSSCP in pre-crisis best practices, their flexibility and adaptability, and their role in prudential regulation. We go on to examine post-crisis PSSCP implementation in the EU and the US, highlighting the different models that have been adopted. Our core argument is that the PSSCPs are only the first step in a complex global reform process that is currently underway at both regional and national levels. This process is, however, marked by political conflicts that have been only partially solved by the G20 and which may determine significant variations amongst the different legal systems, some of which, including EU law, are transforming the international standards into rigid and detailed prescriptions as to the mechanisms and structures of bankers’ compensation, whilst other systems either keep the flexibility of the standards in their regulations or rely mainly on a supervisory approach.

Keywords: Compensation, International Principles and Standards, Corporate Governance

JEL Classification: G20, G21, G28, G30, G32, G34, G38, K22, K31, M12