Denmark’s financial watchdog is urging banks to put in place better checks and balances to prevent excessive bonuses it says may spur greater risk-taking.
The warning follows a decision by the Financial Supervisory Authority this month to criticize Danske Bank A/S (DANSKE) for having a remuneration policy for key staff it said encourages “more risky dispositions” by offering bonuses as high as 200 percent of base pay.
How banks reward their employees has come under greater scrutiny as the gap between financial industry pay and salaries earned elsewhere widens. Danish banker pay gains outpaced increases in other industries as much as fourfold from 2004 through 2008, according to a government-commissioned study into the causes of the nation’s financial crisis, published in September.
“We’re tracking this as we recognize pay is making a difference to what people do at work,” Julie Galbo, the regulator’s deputy director general, said by phone. The FSA commented on Danske following an inspection in November. “Remuneration is very important and particularly who you pay. We want banks to consider who they’re paying and what they get.”
Denmark introduced banker bonus limits more than three years ago, after executives at a number of community banks started paying themselves bonuses that dwarfed their fixed pay.
SEB AB’s Norwegian unit has lost five bankers, including its corporate finance chief Karl Skjelbred, to Danske Bank due to differing opinions on bonuses, newspaper Dagens Naeringsliv reported today.
“There seems to be a broad international consensus that if bonuses can exceed 200 percent, risk-taking becomes too excessive,” Galbo said. “Obviously, the closer to the 200 percent mark you get, the bigger the risk-taking gets.”
The 200 percent limit for bonuses relative to base pay was agreed on by Danish lawmakers at the end of March, under the Capital Requirements Directive IV.
Members of Danske’s executive board can receive variable pay as high as 20 percent of their fixed pay, according to an English translation provided by Danske Bank of the FSA’s Danish language statement. Other material risk takers may receive variable pay as high as 200 percent.
“The FSA cannot see from Danske Bank A/S’s remuneration policy what suitable caps have been set for the variable pay components of the bank’s material risk takers,” it said. “Consequently, the general meeting has not been able to discuss the level of the cap. The FSA has ordered the bank to ensure that such a cap is stated in the remuneration policy in future.”
Danske Bank spokesman Kenni Leth said Denmark’s biggest lender complies fully with bonus rules after agreeing at its annual general meeting to cap variable pay at 200 percent. He declined to comment further.
The FSA also questioned bonus practices at other financial institutions. A 50 percent variable pay-cap at Codan Forsikring A/S, a unit of RSA Insurance Group Plc, and a 400 percent windfall option for risk-takers at FIH Erhvervsbank A/S supported excessive risk-taking at the two institutions, it said. An inspection at Tryg A/S, Denmark’s biggest insurer, didn’t prompt a warning.
The FSA said in February it will name banks that fail to comply with bonus restrictions amid a crackdown on incentive programs found to have fueled Denmark’s property bubble.
Danish police are still investigating how remuneration structures at Danske Bank influenced employees accused of fixing mortgage bond prices in early 2009.
The alleged manipulation, which police say made client bond redemptions more costly, coincided with a fivefold jump in Danske’s first-quarter 2009 trading income. Chief Executive Officer Thomas Borgen said Feb. 7 the bank is cooperating fully with the authorities. Danske has suspended the six employees being probed. Police are also investigating the bank and its mortgage unit.
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