Corporate Governance for Banks in Southeast Europe: Policy - IFC

C. Compensation 58Compensation policies can have an impact on bankperformance and risk taking. In developed financialmarkets, and in particular in the United States,there has been interest in the role that incentivepayments may have had on the level of risk in financialinstitutions. Remuneration has captured the public’sattention because of what appear to be inordinatepayments and the reward of bonus paymentsirrespective of bank performance. But, what elicitedCompensation in SEE“Compensation is not a burning issue in thisregion, and also probably the amounts arenot comparable to some of the grotesqueamounts that have been paid in the West.”Peter Dey, Canadathe most public outrage were the large bonuses paid at ailing institutions that relied on taxpayer funds tocontinue their operations.In developed markets, boards will be taking a much more active role in remuneration policies in the futureby examining the effectiveness of incentive compensation plans, the degree to which incentives support theachievement of bank objectives, the extent to which they encourage excessive risk, and their reputationalimpact. Board remuneration committees that are staffed entirely or predominantly by independent boardmembers can be expected to play an important role.In SEE, on the other hand, high-payout compensation plans are exceedingly rare, and risk taking fueledby large incentives is not a significant issue. SEE banks are almost uniformly small. Compensation iscorrespondingly modest and predominantly in the form of fixed salaries with a considerably smallercomponent of variable compensation. The trading, securitization, and derivatives operations that seem tohave gotten sophisticated banks into trouble are not present. Furthermore, the influence of executives overtheir own pay is more limited.Chart 5: Variable Compensation as a Percentage of Total CompensationPerformance-based variable compensation as a percentage of total compensation for seniorexecutives in the three largest SEE bankstoo opaque to have a viewless 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. 24.40Policy BriefCorporate Governance for Banks in Southeast Europe