Limiting Bankers’ Compensation and Bonuses: The Emerging Global Consensus
Financial Stability Board (G20)
- 40 – 60 percent of the variable compensation of senior executives (and even more for the most senior management) should be deferred over a period of three years or more.
- “Subdued or negative financial performance” should result in less variable compensation, including clawbacks of amounts previously awarded.
- More than half of the variable compensation should be awarded in shares or similar instruments.
- Guaranteed bonuses (after the first year of employment) should not be provided.
- Termination payments should be related to compensation for “performance achieved over time” and should not “reward failure.”
United Kingdom
- Measure performance on the basis of profits rather than revenue, and provide appropriate adjustments for current and future risk and other relevant long-term factors.
- Ban the practice of paying “guaranteed minimum bonuses” over a period of several years and similar incentive arrangements not tied to the employee’s performance during the relevant performance period.
- Defer a substantial portion of a bonus for a period of time, with a minimum vesting period. The guidelines recommend deferring two-thirds of a bonus for at least three years.
- Use multiple performance criteria to determine bonuses, including individual performance, performance of the business unit and the firm, and nonfinancial factors, including adherence to sound risk management practices and regulatory compliance.
Germany
- Prohibit the use of short-term profits in determining variable compensation.
- Tie variable compensation to profitability of both the organizational unit and the overall profitability of the institution.
- Provide for repayment by the trader of all or part of his bonus if the risks that he took on certain investments have generated losses.
Netherlands
- The income of bank executives should be “slightly below” the median of comparable positions within and outside the financial sector.
- Bank executives’ bonuses should be based, in substantial part, on achievement of non-financial targets relating to client satisfaction, risk management, investor relations, operating targets, human resources, integrity, compliance, sustainability and similar intangible goals.
- Only one-third of any cash bonus should be paid immediately; the remaining two-thirds should be deferred for three or four years.
- Non-cash incentive compensation, which could include stock awards but not stock options, should likewise be deferred for three or four years.
- Bonus compensation should range from 0% of fixed compensation (when no profits were generated), to no more than 100% of fixed compensation, and the 100% of yearly salary level should generally be confined to the largest banks with extensive international operations or small banks with low fixed compensation levels.
France
- Bonuses should be paid out over several years (generally, three years) and only if the activity or the institution is profitable. For the highest bonuses, only one-third of the bonus should be paid at the end of the year, the remaining two-thirds should be deferred, and withheld if the operation on which the trader worked turns out not to be profitable.
- One-third of the deferred bonus should not be paid in cash but in stock, which should be kept at least two years.
- The transparency in disclosing to the bank’s shareholders the methods of calculation of the bonuses and the proportion of the bonuses paid compared to the earnings of the bank should be improved.
European Union
- The need to avoid guaranteed bonuses;
- The need to ensure appropriate board oversight of the compensation and risk;
- The need to strengthen transparency and disclosure requirements;
- A “clawback” system whereby bonuses of the traders could be cancelled where the bank’s earnings deteriorated after the original performance period;
- A “bonus/penalty” system: payment of the major part of a bonus would be deferred for an appropriate period of time in order to ensure that the investment or operation on which the remuneration is based has been profitable;
- The calculation of bonuses should take into account the performance of the bank, the business unit and the individual;
- Variable remuneration should be set at an appropriate level in relation to fixed remuneration;
- Bankers should be prevented from exercising stock options and from selling such stocks for an appropriate period of time; and
- Supervisory boards must have the means to reduce compensation if the bank’s performance deteriorates.
So far, no consensus has been reached in the EU regarding the possibility of capping bankers’ remuneration. The Members States have indicated only that they will explore ways to limit total variable remuneration in a bank to a certain proportion either of total compensation or of the bank’s revenues and/or profits.