The ink has scarcely dried on the G20 document on bankers’ bonuses issued at the recent G20 Pittsburgh meeting when disagreement on interpretation surfaced between Europe and the US.
The text of the final agreement among the Group of 20 Nations (G20) calls on countries’ regulators to apply corrective measures, such as higher capital requirements, on non-complying institutions. Compliance in this case includes a provision that “a substantial portion of variable compensation, such as 40 to 60 percent” be paid over periods of three years or more.”
The UK and EU take the position that the “40 to 60 percent” effectively set the range for which all pay deals should fall. The US on the other hand chose to interpret this “40 to 60 percent” as an example of what the term “substantial” in the G20 final text means.
The US interpretation, which is favored by the Federal Reserve, could allow American banks to pay bonuses to certain employees more advantageously than their European counterparts.
Meanwhile, the British Government announced that 5 UK banks have agreed to abide by the G20 restrictions on bank bonuses. The 5 UK banks are Barclays, HSBC, Lloyds Banking, Royal Bank of Scotland (RBS) and Standard Chartered Bank. They issued a joint statement which says: “In a competitive and international business it is right to make sure that our staff are appropriately and competitively rewarded for sustainable, long-term performance. We will work with the Financial Services Authority (FSA) in adopting these remuneration reforms, recognising that all G20 nations have also committed to their implementation to ensure a level playing field.”
Commenting on this development, Chancellor Alistair Darling said that this should “set the standard for all other UK and international financial institutions to follow”.
But what exactly is this “standard”? Simply this: over a 3-year period, British banks will defer payment amounting to 40 to 60 percent of their senior executives’ bonuses. Moreover, 50% of such deferred bonuses will be payable in shares. In line with the G20 agreement, the banks will also implement a bonus clawback clause in the event of subsequent losses arising from risky transactions on which the original bonus is based.
The Financial Services Authority will be able to compel British banks to increase their capital base if they fail to adhere to the new rules on bonus payments.
British Prime Minister Gordon Brown said earlier at the G20 summit: “There is no going back to systems of bonuses that were based simply on short-term speculation and not on the long-term success of companies.”
Chancellor Alistair Darling puts it this way: “It is vital that our financial services industry remains at the forefront of the industry globally and takes a responsible and long-term approach to remuneration.”
France is expected to implement the G20 agreement along what Britain has done. In fact the British model is closely similar to what French President Nicolas Sarkozy announced previously before the G20 summit. He said then that: “From now on, the trader must wait three years to cash in all of their bonus and if in the two years following, their activity loses money, he will not have his bonus.”
Think about it. Will this solve the banking problem? While the G20 agreement regulates how bonuses are to be paid (and clawed back if necessary), there is no agreement on capping the amount of money bankers should be paid. To be sure, bonuses and senior executives salaries have to be disclosed in Annual Reports to shareholders, but that’s little comfort as most times shareholders are not in a position to block compensation issues. As long as the sky is the limit on bankers’ remuneration packages, including bonuses, greed will continue and the next financial crisis may be just round the corner. Wall Street bankers and their London and European counterparts are creative enough to come out with ways and means to ensure that their deferred bonuses are paid out on time.
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Bank Bonus Payments – French Style, With Clawback Provision
unfortunately people are not only creative but they will also try to work ‘around’ the standard to achieve what they want…