After world leaders agreed to banking reforms, British financial institutions have pledged to rework their remuneration packages by the end of the year
Britain has become the first G20 nation to implement the reforms of bank bonuses agreed at the Pittsburgh Summit last month.
After a meeting yesterday morning with the Chancellor of the Exchequer, Alistair Darling, the nation's top five banks pledged to reform their pay and bonus structures by 1 January 2010. In effect, that means immediate implementation given that bonuses for payment early next year will be earned now. The new rules on disclosure, deferral and clawback will thus take immediate effect.
The signatories include Royal Bank of Scotland and Lloyds, as well as three banks that have not had to turn to the Government for financial support, Barclays, HSBC, and Standard Chartered. The chairs of their remuneration committees met Mr Darling to finalise their consent to the new Financial Services Authority (FSA) rules. The banks said in a joint statement: "In a competitive and international business, it is right to make sure that our staff are appropriately and competitively rewarded for sustainable, long-term performance. We therefore welcome the G20 remuneration reforms, and their global nature, as it is essential that banking reward is consistent with effective risk management and that there is parity both nationally and internationally on these issues.
"We will work with the FSA in adopting these remuneration reforms, recognising that all G20 nations have also committed to their implementation to ensure a level playing field."
Mr Darling added: "It is vital that our financial services industry remains at the forefront of the industry globally and takes a responsible and long-term approach to remuneration.
"I am therefore pleased that the main banks incorporated in the UK have agreed to lead the way in implementing the agreement reached on bank remuneration at the G20, and expect them to set the standard for all other UK and international financial institutions to follow."
Mr Darling will write to his fellow EU finance ministers ahead of this week's informal meeting of the EU's Economic and Financial Affairs Council (Ecofin), urging them to implement the agreed reforms as well. The French government is expected to make a similar announcement this morning.
The measures will cover all senior executive officers and employees whose actions have a material impact on their financial institution's exposure to risk. Companies must ensure that the total bonus bill "is consistent with ensuring that they have the ability to maintain a sound capital base over the long term, while managing the risks that arise if an organisation cannot pay competitively to retain the right people".
Between 40 and 60 per cent of variable compensation—or bonus—must be deferred over three years, with at least 50 per cent in shares or share-linked instruments. There will be disclosure of aggregate information on the pay of senior executives.
The move follows promises by Mr Darling and Gordon Brown at the Labour Party conference to tackle the "bonus culture", as well as widespread public concern that, even after the financial crisis, the profits and bonuses awarded by some banks this year suggested it was "business as usual".
There is a widespread agreement that the structure of bank bonuses encouraged excessive risk-taking during the boom, but getting agreement for reform from large U.S.-based former investment banks may be difficult.