EUROPEAN AND US banks are ditching executive bonuses in favour of longer-term incentives and increased basic salaries, a report published today shows.
Bankers’ bonuses ran into billions of euro and dollars during the credit boom and the practice has been blamed for blinding executives to the risky strategies pursued by their organisations.
Last year, New York attorney general Andrew Cuomo found that Wall Street banks were paying bonuses of about twice their net earnings to staff. In one year, Morgan Stanley, Goldman Sachs and JP Morgan Chase paid out a total of $18 billion (€12.5 billion) in bonuses, but had net earnings of $9.6 billion.
A survey of 61 global financial institutions by multinational employment and pay consultancy firm Mercer found they are shifting the emphasis from short-term incentives to increased salaries and deferred bonus schemes.
The survey covered banks and insurance companies in Europe and the US, one-third of which have received some form of government aid and most of which have had limits imposed on what they can pay executives and staff.
Mercer says the majority of firms are cutting short-term bonuses and increasing basic pay.They are also holding bonuses in escrow accounts instead of paying them immediately, and have the right to reduce them retrospectively in case of future losses or poor performance.
Mercer worldwide partner Vicki Elliott, who runs the firm’s financial services consulting network, said at the weekend that national regulators are trying to force the sector to develop performance and reward schemes that don’t encourage excessive risk taking.
“The industry is moving in the right direction,” she said.
Mercer found that 68 per cent of organisations introduced performance scorecards which use financial and non-financial measures. Non-financial criteria include risk management, compliance and client satisfaction.
Similarly, fewer financial institutions are now prepared to guarantee bonuses for new staff irrespective of performance, while 42 per cent have eliminated “golden parachutes” – that is big payoffs for departing executives.
Lex Verweij of Mercer’s European reward consulting group pointed out that financial regulators are concerned that bonuses were paid with a “silo mentality” that did not take into account the companies’ overall sustainability.
Mr Verweij said that while the survey was just a snapshot of initial changes in pay and bonus practices, he added that the direction they were taking was positive.
European governments are still concerned that banks are paying executives too much. AIB originally intended paying its recently-appointed managing director, Colm Doherty, €633,000 a-year, well over the €500,000 cap that the Government wanted to impose on bankers’ pay.
The British and French governments are proposing to levy windfall taxes on outsize bonuses paid to financial services executives.
