Banks should clamp down on “rewards for failure” and structure bonuses so they can be claimed back in the event of losses, experts told the Treasury select committee last week.
Taking evidence from eight experts on the future of City reward, including Charles Cotton, CIPD adviser, reward, the committee agreed that a reform of bonuses was needed in the wake of the financial crisis but differed on how to achieve this.
Labour MP Michael Todd said there was a case for contractual “clawback” of bonuses for executives of failed banks.
“The collapse of these organisations has affected the pension funds of very many people and, as pensions are necessarily long term, the long-term guardianship of the banks is something we should be concerned with,” he said.
There was an argument for holding bonus payments in an escrow account, where they could not be touched for a set period, he added.
Carol Arrowsmith, partner with Deloitte, agreed that such an approach would be useful. “I don’t think it applies in all cases, but many firms could benefit from having a system that rewards the long term,” she said. Contractual “clawback” was much less common than it used to be for top-level executives, she added.
The committee met as Swiss bank UBS unveiled plans for a radical shake-up of its reward structure that would see negative “maluses” operating alongside bonuses.
Charles Cotton said high bonuses were a reflection of the labour market. Turnover in investment banking is 25 per cent and the average cost of replacing a top trader is £305,000, compared with 17 per cent and £7,000 for the rest of the economy, he reported.
In its letter to the banks last month, the Financial Services Authority (FSA) called for them to adopt longer-term reward strategies but was not prescriptive about how to do this.
Asked whether the FSA was right to focus on bonuses, Cotton added: “The FSA must not look at the technical aspects of remuneration without putting them in the wider context of people management. I would have preferred the FSA to address the whole picture rather than looking solely at remuneration.”
Miles Templeman, director-general of the Institute of Directors, rejected the view that banks that had been part-nationalised should face a more direct government clampdown. “If you distinguish between the government and other shareholders there will be a clear distortion, with certain banks at a disadvantage,” he said.
Brendan Barber, TUC general secretary, proposed that staff should have a representative on board remuneration committees, which he described as a “cosy club”. He gained little support for the idea, but suggestions that committees should be more independent and that members should be required to have financial qualifications were welcomed.
Maluses – the opposite of bonuses
“Maluses” will be awarded for losses in the same way as bonuses are for profits under a UBS plan for its top 3 per cent of staff. The bank plans to pay bonuses into third-party accounts that will become available to staff in stages over three years. If the bank makes a loss then “maluses” will be taken back from the accounts so that losses are shared. The bank’s 12 most senior executives will not receive bonuses this year, while new chairman Peter Kurer will take only a fixed salary in future. He is also seeking voluntary repayment of last year’s bonuses from top staff. Shareholders vote on the plan this week.
Who’s getting their bonuses?
Banks whose directors will not take bonuses this year include RBS, HBOS, Goldman Sachs, Deutsche Bank and Barclays Bank.
Lloyds TSB has told staff they will receive bonuses as usual for 2008, although senior executives will be asked to take them in shares.
Northern Rock employees at all levels will get bonuses worth 10-30 per cent of their salary. Bradford & Bingley staff will receive 9 per cent, although CEO Richard Pym, who joined in August, has a guaranteed cash bonus of £139,000 this year and £187,000 next year.
The 1,100 Lehman Brothers staff retained by administrator PricewaterhouseCoopers are receiving their bonuses in full.