Banks Plan Pay Code to Head Off Backlash

The Financial Times reports that the investment banking industry is considering implementing guidelines regarding compensation to ward off further criticism.

However, in reality, legislators and regulators are highly unlikely to impose any kind of standards. The worst the industry faces is being hauled before Congress and called bad names for ten minutes.

The absence of a real threat of external discipline means any moves are window dressing. And it’s easy to impost grand sounding pay schemes in an industry recession when bonus expectations are modest. Even so, the FT suggests it may be hard to reach agreement on measures that are in the shareholders’ best interest, such as having trader pay based on longer term performance. And that’s because on Wall Street, even more so that elsewhere, the inmates run the asylum.

Perhaps the only place you might see meaningful change is in CEO packages, particularly severance. But that won’t come out of these discussions, but from further media and regulatory pushback.

From the Financial Times:

Leading investment bankers are proposing new guidelines on pay and bonuses in the financial sector as they seek to head off a growing political backlash against what were seen as excessive rewards for bankers whose risk-taking helped cause the credit crunch.

In particular, the Institute of International Finance, a global association of banks, is seeking to create a code of best practice, which would discourage banks from giving incentives to traders to take excessively risky bets while failing to censure them if these turn sour.

The idea, which will be privately discussed at an IIF meeting in Rio today, marks the first time that the sector has attemp ted to create any voluntary code.

The discussions about compensation principles – which are at an early stage – are part of a much wider set of reform initiatives being prepared by the IIF.

“We [at the IIF] are discussing this issue [of compensation] right now,” said Josef Ackermann, head of Deutsche Bank, who also chairs the IIF. Charles Dallara, head of the IIF and a former US regulator, said: “Executives need to take a very hard look at compensation structures.”

Ideas being floated include bonuses being deferred until the full impact of bankers’ strategy is clear to prevent them benefiting from short-term high-risk bets that subsequently turn sour.

Another variant would see those who lost money for their businesses having to earn it back before they secured new bonuses. However, the concept is likely to prove highly controversial, particularly among investment bankers in London and New York. “It does not sound workable,” said a senior Wall Street executive, who argued that it was highly unlikely Wall Street banks would agree to any kind of uniform compensation rules for fear of giving up a competitive advantage.

The issue of banking pay is becoming particularly controversial because salaries in the financial industry have exploded this decade relative to other sectors of the economy. However, some sectors with the biggest pay-outs in recent years – such as complex credit – are in the storm of the current credit turmoil. Meanwhile, the banks are still paying high bonuses to many employees, in spite of a swath of writedowns.

This is triggering growing criticism of compensation structures among policymakers and some investors. “At present, compensation incentives are asymmetric . . . This encourages employees to take excessive risks,” says Philipp Hildebrand, vice-chairman of the Swiss National Bank.

But many senior bankers say it is hard for individual banks to change their pay structures, since they are in a competitive market place. “Compensation is [bankers’] incentive for taking risks – that’s really what risk management has to change,” said Mr Ackermann.

“The big problem with compensation is how do you create a culture where people suffer jointly and win jointly? Unfortunately, competitors do not allow that.”

Nevertheless, some bankers hope an IIF code could pave the way towards a broader industry shift and they warn that the sector risks a serious clampdown if it does not take proactive steps.

The IIF was expected to produce a wide-ranging set of proposals for banking reform this week. However, the compensation issue threatens to delay that.

A London-based board member of one major global firm said: “The issue should have nothing to do with the public unless they are shareholders, and the low valuations that investment banks now trade on show how shareholders have voted on the issue.”

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  1. doc holiday

    These CEOs in general are utterly retarded at this point with rampant abusive and pornographic salary manipulations; not one of these humans deserves a trifle of what they steal! They should be viewed with great and increasing disdain!!

    In another related complaint (of mine) in regard to social nepotism, is the amazing fact that The Fed is polluted with unbalanced bias which impacts their ability to function as a clear voice for American citizens, versus their collective focus in serving the needs and requests of the lobbying bank enterprises like SIFMA and the countless parasitic entities that depend on them to dance like puppets! They defend derivative manipulation, not The American Flag or Constitution!

    Fed appointments of members are to be staggered — but, there are currently only five members on the board versus seven.

    Furthermore, all current members of the Board of Governors have taken office during the presidency of George W. Bush!! That is amazing and that is what I call collusion and I question why this has never been challenged!

    Furthermore, one of the most recent boys added to the Fed dance card is Warsh, 35, who has served on Bush’s National Economic Council for the past “four years”, as a special assistant to the president for economic policy. Do the math on the fast track career of this icon and think for a second as to what he has done and what he can do to help solve one of the greatest economic implosions ever to hit American economics!

    Perhaps if he had been employed for a few years as a highly compensated CEO making a salary of $25,000,000 he might seem to have the brain power to help America now, versus being the rich brat he is today who was given this job, because he knew someone important!

    Show your stuff punk, see how you hold up under a Congressional hearing where you defend yourself…punk! Think you can?? Too bad we dont have a Congress or Senate that is willing to defend America and call this into question though! This is insane to let America be abused like this, but its business as usual.

    To make this point a little more harsh, does anyone think this type of boy prodigy has a 1/10th of the math or engineering skills of someone from a generation ago, e.g, someone like — George Washington Goethals a United States Army officer and civil engineer, best known for his supervision of construction and the opening of the Panama Canal. The Goethals Bridge between Staten Island, New York City and Elizabeth, New Jersey is named in his honor, as is the Goethals Medal.

    Does anyone in The Fed have the skill to transform the chaos they created into a sustainable workable solution? Would you trust any of them to build a bridge or a tunnel or a skyscraper? Would you trust your life to this type of nepotism???

    Not me baby!

  2. foesskewered

    Does anyone seriously think bankers are gonna volunteer to punish themselves? Get real. Besides, that’s ignoring a part of the problem (pointed out in a ft article co-authored by Gillian Tett?) that part of the recklessness was the pursuit of yield, in other words, high returns. Unfortunately, you can’t ignore the other part of the equation.

  3. Anonymous

    Is the word “code” in the headline right?

    Re: Banks Plan Pay Code to Head Off Backlash

  4. Anonymous


    I’m sure you hear it often enough but I really enjoy reading your commentary, keep up the fine work!


  5. Francois

    C’mon people! Regulations to control executive pay?


    A more effective way is to modify the laws to give shareholders a REAL say in the business of corporations. Make a majority vote legally binding for instance. Or have the shareholders approve executive compensation; provide them with a 2-page contract exactly like Costco CEO has. No more 300-pages plus that requires the expertise of or an army of CPA to decipher this spoliation of wealth at the expense of shareholders and workers.

    Give shareholders REAL rights, legally binding rights, grab the popcorn and enjoy the show.

    BTW, don’t come up with this “but we need zillionaire compensation to attract those “talents” that are sooooo rare.”

    Yeah right!

    Explain to me why it is that globalization has created an arbitrage of labor while generating a SCARCITY of executive talent compared to the pre-globalization era. This argument defies logic.

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