Enterprise risk management continues to evolve. Practice ranges vary widely. Models are becoming more sophisticated yet less transparent. Customers are becoming more sophisticated yet still depend on black box cookie cutter solutions. Incentive compensation, which everyone agrees is a key component of best practice ERM, lags behind. Given that people will do what you pay them to do, this behavior is not surprising.
There is no question that incentives are important. Most discussions of this topic deal with senior managers at businesses, but incentive led behavior is not purely monetary when considering systemic risk. The collapse of an entire financial system due to contagion from one company, industry or other entity is a big deal. One can, and should, argue that this would be an unintended consequence. Better information about prior decisions and their results can reduce systemic risk.
Keywords: Risk Management
