PwC says bonuses play part in risk management strategy

In a report, Taming Uncertainty: Risk Management for the entire enterprise, PwC claims compensation structures should be treated as a key part of managing a wide range of risks.

Hans-Kristian Bryn, a partner at PwC's global risk management practice, said some firms still incentivise staff to chase revenues with simple revenue-based schemes.

"The downside of generous bonus systems is that it makes bankers deal-hungry. Firms should align their compensation policies with risk capital and corporate objectives," Bryn said, adding that some firms use deferred bonus schemes to encourage staff to take a longer-term view perspective and to focus on balanced, sustainable growth.

PwC's report found that financiers are concentrating on improving credit risk and market risk measurement and reporting, rather than expanding the scope of risk that is being managed actively. Bryn said: "There is still a focus on immediate risks and firms are ignoring some equally important ones." These include reputational risk and those related to low probability, high-impact events, such as September 11.

At a time when banks are cutting costs, there may be little motivation to increase spending. This need not be an obstacle, according to Bryn. "It is not necessarily a cost-intensive investment," he said. "It is about building methodologies, which are in the market already and embracing uncertainty, which is a cultural issue."

PwC cited UBS and Goldman Sachs as two firms that take a more holistic approach to risk management. UBS already takes reputational risk into account. "The key to UBS' thinking is that it tries to ensure that all types of risk are included in the assessment procedure for new projects and products," the report found.