Who are the Material Risk Takers in financial institutions, and why is their remuneration so high?
In the financial sector, certain professionals occupy positions where their decisions have a major impact on the stability and performance of their institution. These individuals, known as Material Risk Takers (MRTs), play a crucial role and enjoy particularly high remuneration. But who exactly are they, and why do they receive such high remuneration?
Let's explore their role, their responsibilities and the compensation mechanisms of these key professionals in the financial sector.
Definition and identification of Material Risk Takers
Material Risk Takers are professionals occupying positions of high responsibility within financial institutions. Their decisions and actions have a significant impact on their organization's risk profile. These individuals are generally traders, portfolio managers, desk managers, risk managers or senior executives.
The identification of Material Risk Takers is based on several key criteria. They occupy positions where their decisions have a direct impact on the institution's risk positions. Their activities therefore involve significant exposure to market, credit or operational risks, and their actions may have major financial consequences for the institution. A significant part of their remuneration is performance-related, reflecting their exposure to risk.
Positions typically considered to be Material Risk Takers include senior traders in equities, bonds, currencies or derivatives, as well as hedge fund managers, trading desk managers, risk managers and members of management committees responsible for investment strategy.
The crucial role of Material Risk Takers
Material Risk Takers play a central role in defining and implementing investment and risk management strategies. Their decisions directly influence capital allocation, risk position management and the overall financial performance of the institution.
Although their title may suggest excessive risk-taking, their role also includes, above all, prudent risk management. They must constantly assess the risks associated with their positions, implement appropriate hedging mechanisms and respect the risk limits defined by the institution.
Their ability to generate superior returns while effectively managing risk is at the heart of their value to the institution. Outstanding performance can translate into significant profits for the institution, a better competitive position and value creation for shareholders.
Why such high compensation?
The remuneration structure of Material Risk Takers is designed to align their interests with those of the institution and its shareholders. This is reflected in a high proportion of performance-linked variable pay, deferred and conditional bonuses, and clawback mechanisms.
The high level of remuneration compensates for several factors. Their careers are highly dependent on their performance, and part of their remuneration is invested in the institution. In addition, MRTs are subject to strict compliance requirements.
The market for financial talent is extremely competitive. Institutions need to offer attractive packages to attract the best professionals, retain key talent and position themselves as an employer of choice.
Compensation for Material Risk Takers generally comprises a relatively modest base salary in relation to the total, an annual bonus often representing several times the base salary, shares or options to align long-term interests, and various benefits (insurance, pension, etc.).
Regulation and recent developments
However, since the financial crisis of 2008, the remuneration of Material Risk Takers has been subject to strict regulation. The bonus/salary ratio is limited in the EU (generally 1:1 or 2:1 with shareholder approval). Part of bonuses must be deferred over several years, and bonuses can be reduced or cancelled in the event of poor performance.
These regulations have led to a reduction in the variable component in some jurisdictions, an increase in deferred and conditional components, and greater transparency in remuneration policies.
Financial institutions are adapting their remuneration policies with greater emphasis on ESG (Environmental, Social and Governance) criteria, better integration of long-term objectives and more complex and balanced remuneration mechanisms.
Controversies and debates
The remuneration levels of Material Risk Takers are the subject of criticism. Some feel that they encourage excessive risk-taking and create a widening gap with average salaries, and that there is a perceived disconnect with economic reality.
Defenders argue that such remuneration is necessary to attract and retain the best talent, that it reflects real value creation for the institution, and that deferral and conditionality mechanisms limit excessive risk-taking.
The debate focuses on finding the right balance between attracting talent, prudent risk management and social and ethical responsibility.
Conclusion
Material Risk Takers occupy a unique and crucial position in the financial landscape. Their strategic decision-making role, combined with significant risk exposure, justifies high, if controversial, remuneration. Their increasingly regulated remuneration structure aims to align their interests with those of the institution, while limiting incentives for excessive risk-taking.
As the financial sector continues to evolve, the role and remuneration of Material Risk Takers is likely to be the subject of ongoing debate and adjustment. One thing remains certain: their importance to the performance and stability of financial institutions is unlikely to diminish. For professionals aspiring to these positions, a thorough understanding of risk issues, the ability to perform under pressure and adaptability to regulatory changes will be essential assets.
