Corporate Governance for Banks in Southeast Europe: Policy - IFC

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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. 40 Policy Brief Corporate Governance for Banks in Southeast Europe
A significant concern is the large percentage of supervisors who indicate that the performance-based compensation of the top three executives in banks is too opaque for them to have a view on it (see Chart 5). If regulators do not have a clear idea of how bank compensation is structured, it will be difficult for them to ensure that compensation is in line with best practices and that compensation structures are in the best longterm interests of the bank. A related concern is the question of CRO compensation. Data indicate that CROs commonly receive a part of their compensation in the form of variable or incentive pay (see Chart 6). This practice has been identified as potentially compromising the independence of the CRO. Chart 6: CRO Compensation in SEE Banks Is the CRO’s variable compensation paid according to the same criteria as other senior executives? NO YES 0% 10% 20% 30% 40% 50% 60% Source: Data from EBRD, Corporate Governance Assessment of Banks (2010–2011). Question asked to selected banks in the region. Most board member compensation is in the form of fixed fees. Few SEE banks use stock options, but some have performance-based awards (see Chart 7). Chart 7: Board Member Compensation Remuneration of nonexecutive directors within the bank is: fixed fee combined with stock options fixed fee combined with stock awards fixed fee combined with performance-based bonus a fixed fee 0 10 20 30 40 50 60 70 80 Source: Data from EBRD, Corporate Governance Assessment of Banks (2010–2011). Question asked to selected banks in the region. Corporate Governance for Banks in Southeast Europe Policy Brief 41
Page 1 and 2: Corporate Governance for Banks in S
Page 3 and 4: Contents I. Introduction...........
Page 5 and 6: I. Introduction The stability of gl
Page 7 and 8: II. Overview of bank corporate gove
Page 9 and 10: framework for coordinating crisis m
Page 11 and 12: III. Sound corporate governance pri
Page 13 and 14: The duty of care requires that boar
Page 15 and 16: A3. Training 20 Finding board talen
Page 17 and 18: Tests for integrity are needed. How
Page 19 and 20: Background Box 1: Legal Requirement
Page 21 and 22: Capacity issues Finally, competent
Page 23 and 24: A5. Role of the chair 29 The chair
Page 25 and 26: Among committees, the audit committ
Page 27 and 28: Background Box 2: Board Committees
Page 29 and 30: Briefing of the board: Audit commit
Page 31 and 32: Bulgaria The Bulgarian banking sect
Page 33 and 34: Recommendation: Evaluations: Banks
Page 35 and 36: Effective systems of risk managemen
Page 37 and 38: strategy. When the executive body o
Page 39: circumstances, these findings shoul
Page 43 and 44: D. Disclosure and transparency 60 D
Page 45 and 46: Supervisors also expressed skeptici
Page 47 and 48: Background Box 5: Disclosure Requir
Page 49 and 50: Recommendations: Disclosure and tra
Page 51 and 52: These limitations are due to the ve
Page 53 and 54: examinations permit a systematic ev
Page 55 and 56: Recommendation: Remedial action: Su
Page 57 and 58: VI. Additional issues A. State owne
Page 59 and 60: VII. Annexes A. Southeast Europe Po
Page 61 and 62: INTERNATIONAL EXPERTS Peter Dey, Ch
Page 63 and 64: B. Important sources of guidance on
Page 65 and 66: C. Synopsis: BCBS Enhancing corpora
Page 67 and 68: Complex or opaque corporate structu
Page 69 and 70: oard. The supervisory board is resp
Page 71 and 72: Bulgaria 19.1% Others 16.3% Unicred
Page 73 and 74: Romania 19% BCR (Erste) 13.1% BRD (
Page 75: For information requests and genera

Corporate Governance for Banks in Southeast Europe: Policy - IFC

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