Pay Non-Executive Bank Directors Junior Debt, Turner Says

Banks’ non-executive directors should be paid in subordinated debt to better align their interests with the stability of their employers, according to Adair Turner.

Fees to non-executive directors “should be paid in subordinated debt, paid in something whereby if you either fail or have to be resolved all the money just vaporizes and there’s nothing left,” Turner, who was chairman of the U.K. Financial Services Authority until it was disbanded in 2013, said in an interview in Amsterdam today. “We want something that maximizes the focus on caution.”

Non-executive directors of banks are facing tougher rules, including plans to make it a criminal offense to behave with “reckless misconduct” resulting in bank failure, according to a Bank of England rule coming into force next year. The central bank has also proposed a clawback of bonuses up to seven years after they’ve been awarded, and is now considering targeting salary, Governor Mark Carney said last month.

“In one way it’s odd to say the salary has to be clawed back, and I don’t know how you’d do that,” Turner said. “It’s tricky. You can almost imagine a human rights case on it. You’ve paid the salary and they’ve bought a house. They’ve spent it or given it to their wife or husband or children.”

Salaries for senior bankers rose an average of 26 percent in 2012 as banks prepared for an EU ban on bonuses of more than twice fixed pay, the European Banking Authority said in a June report. This signals a “material shift from variable to fixed remuneration,” the EBA said.

The highest earning bankers “should be paid in something that doesn’t have upside and so you’re not tempted to drive the risk to take the upside,” Turner said.

Alan Thomson, a director at HSBC Holdings Plc’s U.K. unit, left the lender in October partly because of “incremental concerns” regarding tougher regulation over senior bankers, Chairman Douglas Flint said.

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