The Necessity of Risk Management Culture and Incentive Pay

Late in 2012, the press in Austin, Texas reported the death of a policeman, Houston McCoy, who was known for climbing together with his fellow officer, Ramiro Martinez, the steps of the Tower at the University of Texas and killing the Tower Sniper. Fourteen people were killed and 32 were wounded in the August 1, 1966 tragedy.

Over 46 years later, the December 14, 2012 shootings at Sandy Hook Elementary School took the lives of 26 children, teachers and administrators.

Is history repeating itself? What has happened in the past 46 years to risk management and prevention? Has very little changed? In this essay I emphasize that in order to have success in the field of risk management, two basic fundamental steps are necessary:

1. Buy-in into a culture of risk management by all levels in the organization, and

2. Incentive pay for those who are able to contribute to reducing the potential loss from each identified risk.

The above man-made catastrophes are only two examples among a multitude that illustrate the importance of risk management in all aspects of our society. To prevent future tragedies, it is a necessity that this field becomes a core requirement in all management or related programs of study in educational systems globally. In order to ensure that it takes hold in business life once graduates move on, a positive reinforcement mechanism needs to be established; I recommend monetary rewards as an incentive in order to be effective.

In this essay I describe some devastating risk management failures to illuminate the need for a change in culture. Following is a proposal for incentive rewards for risk management actions using the well-known model of Value at Risk (VaR) and stress analysis. The essay concludes with a short summary.

Keywords: Risk Management, Value-at-Risk,