The Monetary Authority issued a guideline on a sound remuneration system today, focusing on the governance and control arrangements for, and operation of, authorised institutions' remuneration systems in the context of the incentives for risk-taking they may create.

The guideline also strengthens market discipline through timely disclosure by these institutions of information in relation to their remuneration systems.

It reflects the Financial Stability Board's Principles for Sound Compensation Practices and the Implementation Standards to ensure compensation practices in the financial industry are consistent with, and promote, effective risk management. It has also taken into account the industry consultation results conducted in the final quarter of last year and the latest international developments.

Key areas covered by the guideline include remuneration committees' establishment and role; the balance of the constituent elements in a remuneration package; the measurement of employees' performance and the alignment of remuneration payouts to the time horizon of risks. Click here for the guideline.

It will apply to all authorised institutions to promote prudent risk management and ensure a level playing field within the local banking sector. Following its issuance, boards of these institutions should promptly review their remuneration systems and take prompt action to bring them into line with the risk management principles set out in the guideline by the end of this year.

The authority said the guideline reflects its recognition of the incentive effects that remuneration systems may create and the associated implications for banks' risk management. It is also in line with recent supervisory responses in other international financial centres.