Pittsburgh is preparing for the G20 summit, which begins this Thursday. Bonus reform will dominate the agenda. On a country by country basis, here’s who wants what:

The UK

The UK wants:

· A ban on one guaranteed bonuses lasting more than one year, as set out in the FSA’s policy statement on compensation reform.

· Bonuses to be based a multi-year assessment of performance. The FSA says ‘it would be good practice’ for at least two thirds to be deferred. This doesn’t apply to junior staff.

· Bonuses to be calculated by remuneration committees, and based on a percentage of profits not revenues.

· Salaries to be a higher proportion of bonuses. The FSA originally said that salaries should be set high enough to allow banks to pay no bonuses at all if necessary. Banks objected, so this has been changed to ‘guidance.’

· Higher capital ratios. FSA chairman Adair Turner has suggested that big banks making big profits should be required to boost their capital base.

· Greater transparency. A report written by Sir David Walker, who’s heading the UK government’s review of corporate governance in banking, has recommended that the pay of banks’ highest earners be made public.

The UK doesn’t want:

· Bonus caps. They’d be ‘unworkable’ says Alastair Darling.

Soundbites:

Gordon Brown has said he’s “appalled” by bonuses and that there’s, “no going back to the bonus structure of the past.”

The US

The US wants:

· Risk-adjusted bonuses. The Fed is championing bonuses based on risk-adjusted profits. The concept lacks clarity, however.

· Regulators to sit inside banks and monitor pay policies. The Fed is proposing that regulators situated within banks could reject any compensation policies perceived as encouraging too much risk.

· Pay in equity, with clawbacks. Geithner has called for pay to be, “substantially in the form of equity in the firm that vests over time, that is at risk, that can be clawed back if returns don’t materialize.”

· Tougher capital rules. Geithner is also calling for large banks to hold more capital, and more equity capital. He wants the standards to be agreed by the end of 2010 and implemented by the end of 2012.

· Leverage restraints. Aligned to increased capital requirements, Geithner is also all for limits to leverage.

· Greater transparency. US Pay Czar Kenneth Feinberg is expected to disclose the earnings of the highest paid employees at BofA and Citigroup.

The US doesn’t want::

· Bonus caps: Together with the UK, the US was seen as frustrating calls for bonus caps at the G20 preparatory meeting in London.

Soundbites:

Obama says: “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses….We’ll also require these financial firms to meet stronger capital and liquidity requirements and observe greater constraints on their risky behaviour.”

But Obama also says: “…why is it that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or NFL football players?’”

France:

France wants:

· Bonus caps. If France had its way, bonuses would be capped either in absolute terms, or as a percentage of profits. Christine Lagarde has called for global bonus caps to be introduced. When it became clear that other countries didn’t share France’s enthusiasm, France initially said it would impose unilateral bonus caps, but has since dropped this threat.

· Deferrals and clawbacks. France has already imposed new rules and appointed a “pay czar” to monitor the earnings of the best 100 paid traders at each bank in France. Under the rules, traders can only receive a third of their bonus in year one, with the remainder paid in years two and three and clawback if the business area loses money during that time.

France doesn’t want:

· Increased capital requirements: French banks are comparatively undercapitalized. French banks have therefore deemed higher capital requirements unfair.

Soundbites:

Christine Lagarde says: “We want something that can be nailed down to solid parameters … something that effectively limits and frames compensation.”

Sarkozy says: “We want to bring to an end the scandal of bonuses. We want it to stop.”

Germany

Germany wants:

· Bonus caps. Like France, German was pushing for bonus caps at the G20 meeting in September. Angela Merkel specified caps as one of her aims from the meeting. Ominously, German finance minister Peer Steinbrueck has indicated his support for the Dutch proposal to restrict bonuses as a percentage of salaries.

· Smaller banks. Many of Merkel’s comments have been directed at the size of banks and the fact that they should not be ‘too big to fail’

Soundbites:

Merkel says: “Bonus payments are the thing that quite rightly drives a lot of people up the wall.” And: “A bank cannot be so big and so inter-connected that it can blackmail us. They must never again be able to blackmail us and therefore we need international rules.”

The EU

The EU wants:

· An end to guarantees. This may even apply to one year guarantees.

· Clawbacks and deferrals

· Higher relative salaries, or that bonuses are set at ‘an appropriate level in relation to fixed remuneration.’

Soundbites

The Swedish president of the EU is given to exciting phrases such as: “The bonus bubble bursts tonight.” He’s also called bonuses, “dangerous, indecent, cynical and unacceptable.”

The FSB

The Financial Stability Board was set up by the G20 to monitor and advise on changes to the financial system.

The FSB wants:

· Higher capital requirements: The FSB has suggested that banks with limited or low quality capital should be made to prioritise capital accumulation ahead of paying bonuses or dividends.

Soundbites:

Mario Draghi, chairman of the FSB, says bonuses aren’t a private contract any more: “It’s now quite clear that when compensation is not aligned with risk-taking incentives, regulators have the right to have their say.”

The likely outcome

Based on points of agreement, the G20 will almost certainly go for:

· Mandatory deferrals and higher equity

· Clawbacks

· Higher capital requirements (with capital rebuilding to be prioritized ahead of bonus
accrual).

And may also go for:

· Greater transparency: It’s not unthinkable that all banks will be forced to disclose payments to top earners in future.

· A total ban on guaranteed bonuses

· A cap on the percentage of total compensation paid in bonuses (worst case scenario)