Clearly, bank directors have an influential role to play in setting compensation, and they should exercise their authority to establish a more risk-sensitive compensation framework while embedding it in the broader strategic risk management framework of the institution. Directors should understand the consequences of providing too many short-term and onesided incentives.
There are many ways that this risk sensitivity could be accomplished, and it is up to the firms themselves to arrive at solutions. One possibility, for example, is to include more types of deferred compensation, since the risks of certain investments or trades may not manifest themselves in the near term.