I struggle to see any logic behind the European Parliament’s latest initiative to crack down on financial industry pay, beyond a dislike of bonuses. The idea that investment funds should be treated similarly to systemically important banks has even less merit than the original idea.
The basis on which the EU proposed to rein in bank bonuses – despite UK opposition and criticism from supervisors including Andrew Bailey, the incoming head of the Prudential Regulation Authority – was that excessive bonuses gave bankers a perverse incentive to take risks. Read more
As politicians, members of the European Parliament are justifiably proud of the bonus cap they have agreed to impose on bankers. They seem to have found a politically expedient, legally watertight, electorally popular way to use their limited powers to whack high finance where it hurts. That doesn’t mean that the measure, if confirmed, won’t have potentially grave consequences.
It will increase banks’ fixed costs, weaken the link between pay and performance, accelerate the inevitable drift of financial know-how and power from Europe to Asia, and instantly conjure up a thousand more complex, lawyer-driven alternative compensation structures to get round the rules. Read more
Lloyds Banking Group’s decision retrospectively to reduce the 2010 bonuses of senior executives involved in mis-selling loan insurance is a sign of the increased risks that bankers are starting to face personally.
The move strikes me as appropriate: it is an effective sanction against bankers over-selling high-margin products that will earn them big bonuses but turn out to be bad for customers. But the implications for the individuals involved, and for the industry as a whole, are serious.
It has the effect of turning “bonuses” – a form of profit-sharing that most investment bankers have come to rely on for most of their income – into actual bonuses. In other words, provisional payments on which no individual can depend.
The fact that bonuses may be clawed back will make it much more risky to spend them on property or other things. Logically, they now ought to be kept in savings or shares for at least three years while there is a possibility they could be taken back. Read more
Politicians would like to think that Stephen Hester’s decision to give up his bonus marks the start of a mass renunciation of “excessive pay” by private sector bosses. It is certainly time the UK corporate and political world moved on and refocused on what is really important: i.e. how to restore growth. But far from starting a trend, the Royal Bank of Scotland CEO’s case is unique. Here are three reasons why: Read more
Contrast the reaction to rewards paid to UK bank executives – £28m in share bonuses and long-term incentives to nine Royal Bank of Scotland officers, for instance – with the response to stock awards worth almost $100m for Ford Motor’s Alan Mulally and Bill Ford.
Both pay-outs are being made to executives who took on big turnround jobs – and had no responsibility for what went before. Both contain deferred elements. Both, let’s face it, are huge in absolute terms, however you cut them. But whereas many people seem to believe Mulally, Ford’s CEO, deserves his pay-out, his RBS counterpart Stephen Hester and colleagues have attracted mainly brickbats for their rewards. Read more
The financial sector should be a laboratory for sensible new ideas about incentives – rather than a morgue for dead bonus programmes. So it’s distressing to read that investment banks are lagging behind insurers and retail banks in their efforts to design effective new rewards for their chief risk officers.
CROs are supposed to be the linchpin of tighter self-regulation of post-crisis institutions, at least according to the blueprint prepared by Sir David Walker, the City of London panjandrum. He drew up a report in 2009 on how governance at financial institutions should be improved. But research by Hedley May, a City headhunter, points to a lack of consistency among investment banks in the UK about how to tackle risk officers’ remuneration – and to a worrying lack of individuals who can fulfil all the Walker report’s requirements. Read more
Now John Mack, Morgan Stanley chairman, has undercut much of the banking industry’s attempts to justify big bonuses at a time of economic pain largely caused by the financial sector.
All through the current bank earnings season, banks have sought to defend bonuses by saying the ratio of compensation to overall revenues has been cut back. That might be true, but in absolute terms bonuses rose sharply on Wall Street while people were losing jobs on Main Street.
“I still don’t think the industry gets it,” Bloomberg reported the veteran banker as saying yesterday during an appearance in Charlotte, North Carolina (hat tip Huffington Post). “The issue is not structure, it is amount.” Read more
Four down, more to come? The decision by Eric Daniels, Lloyds chief executive, to waive his bonus must have been inevitable after his peers Stephen Hester at RBS and John Varley and Bob Diamond at Barclays gave way and surrendered their payouts. The top bankers have taken a hit for the team.
These sacrifices should not be considered too cynically even if the alternative was public infamy. A multi-million pound hit to the bank account must hurt even the richest banker. But the trouble is that the pay restraint should have reached further down the ranks. Read more