Many corporations may have gotten into trouble not just because they didn't listen to warnings from the their chief risk officer (CRO), but also because they were compensating the risk manager in the wrong way. So says Max Rudolph, an actuary with the Society of Actuaries (SOA) and principal in Rudolph Financial Consultancy. Corporate compensation has become problematic because it is one-sided--managers get bonuses when a company does well as a result of bets they take, but if things later go south because of that same bet, there is no penalty. When it comes to risk officers, the problem is compounded.
"There is a question as to whether risk officers should even receive bonuses at all," says Rudolph. "If the risk manager has a bonus tied to the current year income, it aligns his motivation with the rest of management.