Today, the Treasury Committee released a big report on the banking crisis, and more particularly, on reforming banking pay. Many of its conclusions are in line with other reports on the subject, but several are worthy of note. They include the following:
· Bonuses were to blame
"We found that bonus-driven remuneration structures encouraged
reckless and excessive risk-taking and that the design of bonus schemes was not aligned
with the interests of shareholders and the long-term sustainability of the banks.
...The system of compensation almost surely contributed in an important way to the
crisis. It was designed to encourage risk-taking-but it encouraged excessive risktaking.
In effect, it paid them to gamble. When things turned out well, they walked
away with huge bonuses. When things turned out badly-as now-they do not share
in the losses. Even if they lose their jobs, they walk away with large sums."
· The FSA won't be capping pay
"We do not believe it should be the FSA's function to regulate levels or the amount of pay within the banking sector."
· But banks can't be expected to regulate bonuses themselves
"We have a suspicion that many bankers remain unconvinced by the need for change and believe that, once 'the storm dies down', it will be a case of 'business as usual'. For this reason, self-regulation or a light-touch approach to regulating remuneration in the banking sector is unacceptable."
· UBS never devoted nearly as much to bonuses as Goldman
"UBS told us that in 2001, bonuses represented "68% of total compensation, dropping to 64% in 2002, then held steady in the 65-70% range up until 2007" when they fell to 48% of total compensation.
UBS gave an illuminating insight into the size of bonus payments relative to base salary, telling us that: anecdotally, for the very top revenue producers, for example senior Investment Bankers, a multiple of between 5 and 10 times base pay was as valid in the 1980's as it was in 2007.
Goldman Sachs explained that the proportion of total compensation accounted for by the
discretionary component of employee compensation varied over time, reflecting the stage
of the economic cycle and the firm's performance. This discretionary component amounted to 58% of total remuneration in 2008, down from 80% of total compensation in
2007, 60% of total compensation in 1998 and 62% of total compensation in 1988."
· No cash bonuses at HSBC
HSBC had been "going through a period of
adjustment on the bonus and incentive arrangements across the whole bank for some
period of time"....[they] are increasingly moving towards deferral of bonus payments so that there is no immediate cash payment but there is a payment over a period of time.
· There will be bonuses in some form at RBS
"Whilst we believe that there is a strong case for curbing or stopping bonus payments for
staff on higher salaries and, in particular, for senior managers, we accept the argument
put forward by the Government and UKFI that the position of the banks would be
worsened if they could not make bonus payments."