UK
Pittsburgh has passed, and after a lot of posturing nothing much has happened. There will be no caps on bonuses and no requirement to disclose the names of high earners. Guarantees haven’t been totally outlawed; nor have cash bonuses. Traders may, however, find their lives hampered by new capital requirements and retention bonuses could become a thing of the past.
The full list of ‘Implementation Standards for Sound Compensation Practices’ put forward by the Financial Stability Board (FSB) and agreed to by the G20 is visible here. The summarized version is available below.
On pay in risk and compliance
The FSB simply reiterates what the FSA has already said on the subject of pay in risk and compliance.
It says:
· “For employees in the risk and compliance function, remuneration should be determined independently of other business areas and be adequate to attract qualified and experienced staff.”
On compensation and capital adequacy
The FSB says banks must build up their capital base prior to paying compensation, but it doesn’t say what a satisfactory capital base is, or what it’s comprised of. As The Baseline Scenario points out, this will allow undercapitalized European banks which are reliant on hybrid capital to drag their feet.
More ominously, and perhaps most significant of all the summit’s outcomes, the Telegraph reports that banks have been told that the capital required to support trading books will ‘at least double’ by the end of next year.
The FSB says:
· “National supervisors should limit variable compensation as a percentage
of total net revenues when it is inconsistent with the maintenance of a sound
capital base.”
On deferred bonuses
Unsurprisingly, and uncontentiously, the FSB has come out in favour of deferred bonuses. Its recommendations (40-60% should be deferred for at least three years) are neither onerous nor groundbreaking: most banks have similar schemes in place; UBS paid some of its senior staff 100% deferred stock bonuses for 2008.
The FSB says:
· “…a substantial portion of variable compensation, such as 40 to 60 percent,
should be payable under deferral arrangements over a period of years”
· …”these proportions should increase significantly along with the level of
seniority and/or responsibility.”
· “The deferral period described above should not be less than three years.”
On clawbacks
The FSB wants deferred bonuses to be clawed back if either an individual’s business area or the firm as a whole perform badly. This is nothing new. Th likes of Goldman Sachs have been slow to introduce clawbacks, but Citigroup, UBS, RBS and Morgan Stanley have them in place already.
The FSB says:
· “In the event of negative contributions of the firm and/or the relevant line of business in any year during the vesting period, any unvested portions are to be clawed back, subject to the realised performance of the firm and the business line.
On guaranteed bonuses
The FSB has come out against guarantees lasting more than one year. Again, there is no change here from the FSA’s recommendations. More significantly, the FSB is outlawing guarantees paid to existing staff, such as those reputedly offered at BofA Merrill Lynch this year. This could make retention an issue during a merger and make it challenging for struggling firms to retain people.
The FSB says:
· “Guaranteed bonuses are not consistent with sound risk management or the pay for-performance principle and should not be a part of prospective compensation plans. Exceptional minimum bonuses should only occur in the context of hiring new staff and be limited to the first year.
What the Pittsburg guys completely failed to address (surely by lack of real inside knowledge) is somehow key to the future health of the financial system :
1/ Bonus structuration should reflect the area 1 work 4. Pointless 2 penalise BO/MO/FO guys pushing buttons of an STP system or taking orders. They bear the same stress/constraints as anybody. Pointless as well 2 penalise cash markets operators : returns are immediate (ish). However : FAR more relevant 2 delve further in2 the bonus calculus of people dealing products whose maturities & risks evolve through decades. Bonus deferral should be lined up with the maturity and joint risk dependency of some products.
2/ The FSA is a failure at many many levels. Its weaknesses have been deliberately exploited by banks since years as empowered bank staff realised ages ago the FSA had many loopholes.
3/ Guarantees : shoudd be forbidden. After all , aren’t we suppose to be all in a so-called “meritocratic industy” ?
Then again : Nb 10 is to blame here…otherwise how on earth could the HMS Treasury let the a former Warburg Investment Banker being in charge of the regulatory body of the most active financial market ?
Beyond be