The Executive Compensation Controversy - Fondazione Rodolfo ...

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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISsuit and announce it would abandon option awards. Pressures to limit bonuses morebroadly mounted after the French bank Natixis SA revealed plans to pay 3,000 tradersand other employees €70 million in bonuses for 2008; Natixis had a loss of €2.8billion the prior year, and had received €2.0 billion in a state bailout package. As aresult of these pressures, on 30 March the government imposed a ban on all optiongrants until at least the end of 2010 for any bank or automaker receiving governmentassistance, and also banned bonuses not expressly linked to previously set targets. 122• On 2 April, the “Group of 20” (G20) leading economies established the FinancialStability Board (FSB) to flag potential problems in the global financial system. Thenewly formed FSB immediately issued guidelines for banking bonuses, recommendingthat bonuses should be adjusted for the risk the employee takes, should be linked toperformance, should be deferred to take account of the duration of the risks beingtaken, and should be paid in a mixture of cash and equity. 123The controversy over banker bonuses continued to simmer throughout the summer, anderupted at the end of August ahead of the 24 September G20 summit in Pittsburgh:• On 14 August, Germany’s banking regulator, BaFin, announced new rules allowing for“clawbacks” of individual compensation. 124• On 26 August, French President Sarkozy indicated that he would push for limits onbanking bonuses at the G20 summit. The UK and Germany quickly indicated theirsupport. 125 On the same day, Mr. Sarkozy announced sweeping new rules for bankingbonuses in France. Under the new rules, traders cannot receive more than one-third oftheir bonus in cash the current year. The remaining two thirds must be staggered overthe following two years, paid in part in restricted shares, and be subject to forfeiture ifthe trader’s department loses money over that time.122 Moffett, “France Faces Pressure Over Bonuses As Natixis Sets $94.6 Million Payout,” The Wall StreetJournal (March 28, 2009), p. B5; Gauthier-Villars, “Leading the News: Sarkozy, banks set new limits onbonuses --- Pay czar to monitor best-paid traders at France's banks,” Wall Street Journal Europe (August 26,2009), p. 3.123 Larsen, “Rules unlikely to end bonus furore,” Financial Times (April 2, 2009).124 Smith, “Germany's BaFin Clamps Down On Bank Risk Mgmt, Bonuses,” Dow Jones International News(August 14, 2009).125 “UK joins issue with France on bonus issue,” Global Banking News (August 26, 2009); “Germany backscalls to limit banker bonuses,” Agence France Presse (August 28, 2009); “France, Germany want bonus curbs,”The Times (September 1, 2009), p. 36.-99-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISMr. Sarkozy’s announcement was in part a reaction to news that BNP Paribas SA (whohad canceled scheduled option awards the prior year) had set aside €1 billion for 2009bonuses. Following the new rules, BNP Paribas cut its scheduled bonuses in half, andBNP Paribas, Societe Generale, and Credit Agricole and agreed to new rules onbanking pay and disclosure of bonus payments. 126• On 2 September, the Finance Ministers from the 27 European Union countries met todiscuss banking bonuses. By the conclusion of the meeting, Belgium, Luxembourg, theNetherlands, Germany, and Sweden all indicated their support for the French model. 127On the same day, UK Prime Minister Gordon Brown, French President Sarkozy, andGerman Chancellor Merkel co-signed a letter to the EU president supportingregulations where bonuses are deferred and subject to forfeiture if performancedeteriorates in the future. 128• On 3 September, the head of Sweden’s central bank called for discussions on bankingbonuses at the G20 summit, claiming that “it’s not appropriate that we have bonusesthat allow people to cash in big and then ruin the system.” 129• On 4 September, the finance ministers of France, German, Italy, Luxemborg, theNetherlands, Spain, and Sweden jointly called for a ban on all guaranteed bonuses anddeferral of all other bonuses over several years. 130• On 5 September, the G20 finance ministers met in London, concluding as a group thatbanking bonuses were a key cause of the financial crisis. The G20 countries agreed thatthey would implement tax and other policies to encourage banks to reward long-termrather than short-term success. However, the group failed to agree on specifics of bonusregulations: the German and French ministers argued for strict caps on bonuses basedon short-term gains, while the USA Treasury Secretary argued that the focus should beon requiring banks to hold more capital, and not global restrictions on compensation. 131126 Davies, “France announces bank bonus crackdown and urges G20 nations to follow suit,” The Guardian(August 26, 2009), p. 23; Inman, “Finance ministers disagree on bonuses,” Australian Financial Review(September 3, 2009), p. 16.127 ; Annan, “EU Finance Ministers Back Curbing of Bank Bonuses,” IHS Global Insight Daily Analysis(September 4, 2009).128 Monaghan, “Brown sets out plan for bonus clampdown,” Daily Telegraph (September 4, 2009a), p. 1.129 “Sweden central bank chief: banking bonuses need to change,” Reuters News (September 3, .130 “G20 : Buzek Backs Calls to Limit Bankers' Pay,” Europolitics (September 10, 2009).131 Lekakis, “Bank executives face $50m loss under bonus bans,” The Advertiser (September 7, 2009), p. 55;“G20 punts on bank bonuses,” UPI Energy Resources (September 5, 2009)-100-
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