Corporate Governance for Banks in Southeast Europe: Policy - IFC

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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
A significant concern is the large percentage of supervisors who indicate that the performance-basedcompensation 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 toensure that compensation is in line with best practices and that compensation structures are in the best longterminterests of the bank. A related concern is the question of CRO compensation. Data indicate that CROscommonly receive a part of their compensation in the form of variable or incentive pay (see Chart 6). Thispractice has been identified as potentially compromising the independence of the CRO.Chart 6: CRO Compensation in SEE BanksIs the CRO’s variable compensation paid according to the same criteria as other senior executives?NOYES0% 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 somehave performance-based awards (see Chart 7).Chart 7: Board Member CompensationRemuneration of nonexecutive directors within the bank is:fixed fee combinedwith stock optionsfixed fee combinedwith stock awardsfixed fee combinedwith performance-based bonusa fixed fee0 10 20 30 40 50 60 70 80Source: 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 2: © Copyright 2012. All rights reser
Page 7 and 8: II. Overview of bank corporate gove
Page 12 and 13: A1. Responsibilities of the board 1
Page 14 and 15: A2. Qualifications 19Bank boards sh
Page 17: Tests for integrity are needed. How
Page 20: RomaniaIn Romania, Regulation No. 1
Page 23: A5. Role of the chair 29The chair o
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Page 34 and 35: B. Risk management and internal con
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Page 42 and 43: The disclosure of compensation, whi
Page 44 and 45: Skepticism regarding disclosureBeyo
Page 46: decision concerning the appointment
Page 49 and 50: Recommendations:Disclosure and tran
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: Sup
Page 57 and 58: VI. Additional issuesA. State owner
Page 59 and 60: VII. AnnexesA. Southeast Europe Pol
Page 61 and 62: INTERNATIONAL EXPERTSPeter Dey, Cha
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: Bulgaria19.1% Others16.3% Unicredit
Page 73 and 74: Romania19% BCR (Erste)13.1% BRD (So
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