Banks Admit Better Disclosure on Bonuses Needed

Friday, 03 Sep 2010 07:30 AM

 

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Banks have acknowledged they need to be more open about the size of their bonus pools and the methodology for paying star bankers after making progress in other areas of reforming pay structures.

More policy changes are needed to reduce the excessive risk taking that was blamed for contributing to the global financial crisis, according to a survey released on Friday by the Institute of International Finance (IIF), a bank lobby group.

"There has been a surprising amount of progress in a number of areas, but not all institutions are there yet and there is still work needed in shuffling the industry down the right path in some areas," said Nick Studer, a partner at consultancy Oliver Wyman in London and a co-author of the report.

"There is a definite risk of returning to the first mover disadvantage mindset, whereby a bank thinks if they do anything to overhaul compensation practices they risk losing people," he told Reuters.

Rick Waugh, CEO of Canada's Scotiabank and co-chairman of an IIF steering committee on pay issues, said banks had to do more, including increasing emphasis on linking incentives to performance.

"Importantly, we do not see this as restricting the level of compensation, but that banks adopt policies to ensure that incentives do not induce risk-taking in excess of the firm's risk appetite," Waugh said in a statement.

The report, conducted with Oliver Wyman and based on a survey and interviews with banks accounting for 70 percent of wholesale banking revenues, showed most banks were implementing compensation systems in line with guidelines set out by the Financial Stability Board (FSB) a year ago.

A senior FSB official said banks are still falling short of what is needed, however.

"I think financial institutions are very far in many cases from meeting these standards," Svein Andresen, secretary general of the FSB, told Reuters at a regulation conference in Seoul .

Banks still hadn't done enough to change the way they adjust for risk in their compensation policies, he said. "There are still substantial differences in the ways these principles and standards have been implemented."

Industry critics have said not enough has changed and banks are reverting to offering massive payouts.

Credit Suisse this week said its top UK bankers will receive a special September bonus. The Swiss bank has led with some pay reforms, but said it needs to remain competitive after cutting bonuses last year.

The IIF report said politicians need to acknowledge that some reforms, such as basing bonuses on profits adjusted for risk or capital usage, would take several years. That needs consistent regulation to help the process, it said.

The IIF said boards and remuneration committees are now more involved in setting the bonus pool and designing pay plans.

The structure of payouts has been significantly reformed since the start of the crisis, with more money deferred or paid in shares, the survey showed.

Deferred compensation was now 39 percent of the compensation pool, 85 percent of surveyed banks are deferring pay for three years or more, and nearly 70 percent of deferred compensation is paid in shares, it said.

Firms have also cut rewards for failure, the IIF said, with unconditional payouts halved and multi-year guaranteed bonuses almost eliminated. It said 15 percent of firms still had "golden parachutes," but most were attempting to eliminate them.

© 2014 Thomson/Reuters. All rights reserved.

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