Banks should be forced to reveal pay policies that may encourage irresponsible risk taking, global regulators said in rules aimed at pressuring lenders to curb compensation and take back bonuses if performance is poor.
Lenders should disclose the main criteria used to decide on bonus awards, according to rules published today by the Basel Committee on Banking Supervision. They should also reveal figures on how much they cut planned bonuses and claw back money already paid out when individual bankers or the firms perform worse than expected, the Basel group said.
The measures “will support effective market discipline” by allowing potential investors to assess the soundness of a bank’s pay polices and risk strategy, the committee said in a statement on its website. Investors should be able to make “meaningful assessments” of whether banks are acting responsibly, the committee said.
Regulators across the world are targeting bankers’ pay and bonuses to prevent a repeat of the excessive risk taking and focus on short-term profits that they say contributed to the global financial crisis that followed the collapse of Lehman Brothers Holdings Inc. in September 2008. They have called for payouts linked to success instead of rewarding failure.
Lenders should reveal at least annually the policies and criteria they have in place for deciding on cuts to planned bonus awards and clawbacks, the Basel group said.
The European Union led the way last year by imposing limits on cash payouts and the size of bonuses across the 27-nation region. They include provisions for national regulators to take back bonuses paid to senior managers whose risks are later found to have caused losses at a financial firm.
Rules introduced to curb bonuses may lead to some increases in initial awards to offset the risk of possible clawbacks, Simon Gleeson, a financial-regulation lawyer at Clifford Chance LLP in London, said in a telephone interview.
“If an employee knows there is that risk of losing part of their bonus they will demand a premium on it,” said Gleeson.
Today’s measures from the Basel committee “could be the first step in finding out how the bonus rules have increased bonus levels of the industry.”
Banks should reveal the amount they pay out in bonuses each year, and how many staff receive one, the Basel committee said. They should also release information on what percentage of bonus payments have been deferred, and how much is paid out in shares instead of cash.
Under the EU’s system, supervisors can also force a bank to withhold money to bolster its capital base, rather than pay out bonuses, if the lender’s reserves are too low.
The Basel measures may also help to show the extent to which a bank can make up its losses by clawing back bonuses, Gleeson said.
“Where they are clearly going here is -- can we quantify and state publicly the amount of a bonus pool which is actually loss absorbing,” Gleeson said. “These rules may help us start to quantify that.”
Goldman Sachs Group Inc. (GS) almost doubled compensation for Chairman and Chief Executive Officer Lloyd C. Blankfein to $19 million for 2010 even as earnings dropped 38 percent and the stock was little changed, according to the New York-based firm’s proxy statement in April.
HSBC Holdings Plc (HSBA) said in May about 19 percent of shareholders voted against the bank’s executive pay report, marking the biggest protest over compensation among the U.K.’s five biggest banks this year.
Michel Barnier, the EU’s financial services commissioner, has said that he will take further action after banks failed to heed “calls for moderation” in this year’s bonus round.
European banks are at a competitive disadvantage in employee compensation compared with their U.S. counterparts because of differences in rules imposed by regulators, human- resources company Mercer said last month.
The “unlevel playing field” is caused by the different U.S. and European approaches to deferred bonuses, Mercer said.
Today’s measures add to beefed up capital and liquidity rules endorsed by the Basel committee. The group approved plans on June 25 forcing lenders whose collapse would roil the global economy to hold as much as 2.5 percentage points in additional core capital.
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