Corporate Governance for Banks in Southeast Europe: Policy - IFC

C. Compensation 58
Compensation policies can have an impact on bank
performance and risk taking. In developed financial
markets, and in particular in the United States,
there has been interest in the role that incentive
payments may have had on the level of risk in financial
institutions. Remuneration has captured the public’s
attention because of what appear to be inordinate
payments and the reward of bonus payments
irrespective of bank performance. But, what elicited
Compensation in SEE
“Compensation is not a burning issue in this
region, and also probably the amounts are
not comparable to some of the grotesque
amounts that have been paid in the West.”
Peter Dey, Canada
the most public outrage were the large bonuses paid at ailing institutions that relied on taxpayer funds to
continue their operations.
In developed markets, boards will be taking a much more active role in remuneration policies in the future
by examining the effectiveness of incentive compensation plans, the degree to which incentives support the
achievement of bank objectives, the extent to which they encourage excessive risk, and their reputational
impact. Board remuneration committees that are staffed entirely or predominantly by independent board
members can be expected to play an important role.
In SEE, on the other hand, high-payout compensation plans are exceedingly rare, and risk taking fueled
by large incentives is not a significant issue. SEE banks are almost uniformly small. Compensation is
correspondingly modest and predominantly in the form of fixed salaries with a considerably smaller
component of variable compensation. The trading, securitization, and derivatives operations that seem to
have gotten sophisticated banks into trouble are not present. Furthermore, the influence of executives over
their own pay is more limited.
Chart 5: Variable Compensation as a Percentage of Total Compensation
Performance-based variable compensation as a percentage of total compensation for senior
executives in the three largest SEE banks
too opaque to have a view
less than 20%
20% to 40%
40% to 70%
more than 70%
0% 10% 20% 30% 40% 50% 60%
Source: Data from EBRD, Corporate Governance Assessment of Banks (2010–2011). Question asked to regulators in the region.
58 2010 BIS Principles, Section III.D, p. 24.
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Policy Brief
Corporate Governance for Banks in Southeast Europe