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Answer: Increase the percentage of incentive compensation that is paid in the form of company stock.
**D is correct.** Increasing stock-based compensation better aligns the interest of senior managers and shareholders and incentivizes long-term value creation. **A is incorrect.** This would create a conflict of interest as trading desk managers would have incentive to set risk limits that maximize their own compensation rather than align with the bank's overall risk appetite. **B is incorrect.** Setting incentive compensation at the same fixed level for all employees is too strict and does not differentiate appropriately between business functions and performance levels. **C is incorrect.** Best practices discourage the offering of multi-year guaranteed bonuses at all, as they can create moral hazard and reduce accountability.
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A banking supervisor is preparing a set of recommendations to improve the incentive compensation policies in accordance with best practices regarding risk governance and corporate governance. Which of the following actions is the most appropriate for the supervisor to recommend a bank take to improve its compensation structure?
A
Require that trading desk managers develop the risk limits used to determine their team's incentive compensation.
B
Set incentive compensation levels for all employees of the bank at the same fixed percentage of base salary.
C
Assign multi-year guaranteed bonuses for risk managers but performance-based bonuses for senior executives.
D
Increase the percentage of incentive compensation that is paid in the form of company stock.
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