Performance management for Risk Managers: A question unanswered

This thing struck me especially after I myself started working on risk management. I had taken extra course on compensation management much to surprise of most of my friends. One of the important take away from the course was the importance of tying of compensation with performance. In nutshell, right performance must be rewarded with right (desired) compensation technique. Thus performance management is tightly coupled with compensation management and can have far reaching impact on employee’s satisfaction. You may be wondering why am I writing this “gyaan “but this has to do with the current debate regarding executive compensation and its role in financial crisis.

To measure the performance for any role we must first define the metrics and the process for the same. Revenue generated, number of customer added etc are various metrics used to measure the performance of sales personnel. So what could be metrics for risk manager just try to think? It should be how well company performs or withstand during the adverse business conditions. But now consider how you would have appraised risk managers during 2003-05 when global economy was booming and nothing wrong or unexpected was happening. The companies earning were growing year on year basis. At this time imagine particular risk manager not allowing banks to give out loans for housing, asking to maintain high liquidity and not taking exposure to CDO and other complex instruments since he recognized they were dangerous. At same time all its competitor were doing exactly opposite and thus were able to grow at twice the rate of the other bank. How would have that risk manager been appraised at end of 2003? He would have been criticized for being risk averse and would have lost his job in year or two to other set of risk managers. This is because metrics to measure risk manager performance is not that clear. During that period there were no crisis so how you measure their performance. In absence of the adverse conditions everyone were able to “so called withstand” the year but some made more profits than the others so people tend to appraise the other risk manager with better grade and hence better compensation. Even the sophisticated technique like balance scorecard would fail to measure the performance of risk manger. Since here we would look from all perspective so on revenue and profit front the risk manager would score low. I know someone fresh out of MBA would like to use some business terms and explain me that performance should be in how well risk has been managed with respect to defined risk appetite of the company. I agree to this but who defines the risk appetite? If it is board or CEO then if risk manager followed that then why are they being condemned for their action today? It was in line with the goals set for them.

So then how should we appraise risk manager? What should be metrics and process? All human resource manager needs to work this out. I believe that we should now look at long term for appraisal and compensation management for risk managers. But then what should be this long term? I have no answer to this. The question is open for all of you to answer. Maybe someone can point to honorable Robert Kaplan to work out special metrics for risk manager or throw some light on this area. What say guys?