Salz Review - Wall Street Journal

Salz Review
An Independent Review of Barclays’ Business Practices
136
11.25 As Barclays continues to take action on pay levels, it must develop a clear
understanding of what it wants to reward staff for. This could include:
― Implementing a more robust process for determining individual value creation
beyond that attributable to the franchise benefits of being part of Barclays;
― Significantly increasing the weight given to staff behaviours and contributions
to the bank’s purpose; and
― Assessing the true sustainable value contributed by individuals and teams –
as far as possible, fully adjusted for all forms of risk.
Recommendation 21: Pay principles
The Board, aware of the reputational and behavioural implications of pay,
should align pay to levels that reasonably reflect individual talent and the
contributions that individuals make, aiming to link pay to the long-term success
of the institution.
Approaches to pay across the bank should be based on common underlying
principles and be aligned with both the Group’s values and the level of risk to
which it is exposed. Individual pay should systematically reflect individual
adherence to values and standards.
Barclays’ approach to reward should be much more broadly based than pay,
recognising the role of non-financial incentives wherever possible.
Fixed versus Variable Compensation
11.26 An important issue faced by parts of the banking industry is the ratio of variable to
fixed compensation. High levels of variable compensation have long been popular
within investment banking because they enable compensation to be tied to the
significant volatility of markets and income – and so be reduced if profitability falls.
However, over a period of consistent growth a pattern has developed for variable
components of salary to be consistently high and linked to individual revenue
performance rather than the profitability of the organisation.
11.27 The FSF asserts that “compensation systems should link the size of the bonus pool
to the overall performance of the firm”. 215 However, there is a danger that the size of
variable compensation pools is driven too much from a ‘bottom up’ perspective with
limited linkage to the overall success of the firm. Successful business areas demand
financial recognition of their performance even if the firm or industry as a whole has
performed badly. At the same time, poorly performing (even loss making) areas may
not accept zero – and rather argue for a degree of variable remuneration to reflect
individual performance and to support staff retention. Such an approach serves to
reduce the true variability of incentive pay.
11.28 Across the investment banking industry generally, and Barclays in particular,
compensation has been much more variable upward in response to good
215 Financial Stability Forum, FSF Principles for Sound Compensation Practices, 2009;
www.financialstabilityboard.org/publications/r_0904b.pdf.