Risk Management Versus Incentive Structures

An inherent, and seemingly unavoidable, conflict exists between the practice of risk management and the norms of corporate incentive structures. Is good risk management undermined by incentive structures? Effective risk practices seek to diminish volatility, accepting the loss of profit to ensure long-term sustainability. Yet compensation and incentives often reward short-term financial performance. How should the CRO tackle this seemingly inexorable dilemma?

Risk may intrinsically be neutral, and incentives can slow down that neutrality. Risk functions costs you money in the short term. Does the incentive structure dictate the culture of risk? Viewed from a different perspective, should the risk culture dictate the incentive structure?

Gary Bowman

Research Associate, Cambridge Centre for Risk Studies

Michelle Tuveson

Executive Director, Cambridge Centre for Risk Studies, University of Cambridge