Salz Review - Wall Street Journal

Salz Review
An Independent Review of Barclays’ Business Practices
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different businesses are inevitably very different. Nonetheless, it is essential that
Barclays’ pay arrangements are designed and evaluated with sufficient regard for how
they align with the Group’s values, what behaviour they incentivise, and how
adjustments can be made not just for bad behaviour but also for losses or costs
incurred in the future. Although we would have hoped to find some common
principles, we could find no evidence – for the period addressed by our review –
of a consistently implemented Group-wide ‘philosophy’ and approach to pay.
11.9 At the heart of any consistent philosophy and approach to pay, we would expect
balance in the way that the burden of risk is shared between employees and
shareholders. We would expect careful consideration of the appropriate sharing in
the fortunes of the entire institution – both in good times and in bad. And we would
expect under-performance not to be rewarded.
11.10 The essence of a bank is to take risk. The first call on earnings should therefore be
to maintain an appropriate capital base to support the risks taken. As the Financial
Stability Board observed, significant financial institutions should ensure that total
variable compensation does not limit their ability to strengthen their capital base. 206
Pay should then reflect risks taken, properly aligning the consequences of risk so
that employees only benefit if shareholders do too. Despite the sophistication of
accounting standards, the complexity of some bank businesses means that the
financial accounts will not be able to reflect all risks at a given point in time.
This makes it difficult to reflect risk fully in compensation decisions.
11.11 The Financial Stability Forum (FSF) observed in 2009 that “as a practical matter,
most financial institutions have viewed compensation systems as being unrelated to
risk management and risk governance”. The FSF illustrates this by pointing out that
“two employees who generate the same short-run profit but take different amounts
of risk on behalf of their firm should not be treated the same by the compensation
system. In general, both quantitative measures and human judgment should play a
role in determining risk adjustments.” 207 Barclays appears to have made limited use
of risk metrics and risk input in key compensation decisions. In our view, risk
considerations should be embedded throughout the compensation system.
Compensation outcomes should be symmetric with risk outcomes to the extent
possible. The FSF observed that some of the “greatest barriers to progress towards
the principle that compensation must be adjusted for risk are:
― Determining and implementing the proper mix of executive judgment and
quantitative risk measures;
― The difficulty of incorporating types of risk for which measurement is at early
stages such as liquidity or reputation risk. The difficulty is not a reason to
ignore such risks;
― The difficulty of safeguarding the fairness of risk adjustments;
206 Financial Stability Board, FSB Principles for Sound Compensation Practices – Implementation Standards, 2009.
207 Financial Stability Forum, FSF Principles for Sound Compensation Practices, 2009;
www.financialstabilityboard.org/publications/r_0904b.pdf.