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Bankers' bonuses
Watered down
Aug 13th 2009
From The Economist print edition
A new code on rewarding bankers will not restrict payouts
NOBODY trembled when the Financial Services Authority (FSA), Britain’s financial watchdog, unveiled a
new remuneration code for banks on August 12th. Rather than prescribing how big banks should mend
their executives’ pay, it merely suggested some remedies. At issue are the perverse incentives which led
some bankers to pitch their banks, and the entire financial system, into peril. Those who suffered were not
usually these overpaid employees but shareholders and taxpayers—and customers, who may have been
ripped off along the way.
Anyone hoping for a radical change will be disappointed—though the City will be relieved. The FSA’s initial
draft in March contained threats to limit the share of bonuses that can be taken in cash, forcing at least
two-thirds of the payout to be deferred and depend on future performance. Those threats have turned into
“recommendations” that can be ducked, provided a bank can explain its behaviour. The FSA’s only real
sanction will be to require a bank to put up more capital if its remuneration policy is judged over-risky.
But how would the riskiness be calculated by anyone outside the bank?
Peter Montagnon, investment-affairs director at the Association of British Insurers, which broadly applauds
the new code, agrees that the calculation is a sticking-point. But “perhaps the threat of a higher capital
requirement is enough,” he says.
Nor did the FSA seem exercised by the news earlier this month that Barclays, a rapidly expanding bank,
had agreed to pay a few new recruits multi-year guaranteed bonuses. The practice seems to be alive and
well among banks trying to steal what they regard as top talent from each other.
Hector Sants, the FSA’s chief executive, maintained recently that the size of individual payments was a
question not for the regulator but “for politicians and society as a whole”. Few in Westminster appear to
have any appetite for it, though in France it is a different story. There, the government has ruled that
bonuses, limited to a one-year guarantee, must be paid out of profits, not revenues (see article).
The Conservative Party, which is likely to form the government after the next general election, to be held
by June at the latest, is also reluctant to be prescriptive. “We don’t want a cap on pay, apart from a limit
on cash bonuses paid to those in state-controlled banks,” says an adviser to George Osborne, the shadow
chancellor. “But we don’t want business as usual either.” The party would like to turn the FSA into a
consumer-protection agency and give financial supervision to the Bank of England, which would be less
inclined to kowtow to bankers, he says.
At the heart of the general reluctance to be radical is a fear that unilateral measures might drive big banks
away from London, putting its dominant financial position at risk. That is the main reason why the FSA’s
code has been watered down, as its preamble admits. It will apply only to around 26 of the biggest
banking operations based in the capital. And it looks unlikely now to be any tougher than standards being
developed by the Basel Committee on Banking Supervision, a rich-country forum, and by the European
Union.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
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