Taxpayers have recently provided UK banks with nearly £1.3trillion in support. They are therefore entitled to expect that the sector is more risk-aware in future. However, two aspects of Sir David Walker's proposals for remuneration in the UK banking sector risk damaging rather than strengthening it.
Firstly, he recommends that approximately a quarter of pay is withheld for five years, where it is paid to banking executive directors earning more than the median (one recent discovery being that there are large numbers of people paid more than the executive directors in banks). Secondly, he says that one third of a bonus would be paid out at the end of the year, with the full bonus only being paid three years on.
As other business sectors in general pay out bonuses in full at the end of the year and any "long-term" awards are paid out in full at the end of three years, why would a financial business consider staying in the UK when they could move offshore or to other European countries who will probably not have such restrictive rules? These proposals if unamended will deter senior talent from staying in the quoted banking sector just when they are needed.
Also, excessive deferral will lead to higher pay all round. No one puts particularly high value on pay receivable five years' time and will make sure that adequate pay is received in the first few years. There is already anecdotal evidence of salaries and up-front payments creeping up because of anticipated restraints on variable pay.
The reason given for these proposals is that the banking sector faces uniquely high risks; greater deferral is required before those risks can be measured and payouts can occur. However, this does not justify going beyond what is required. Remuneration committees need to have flexibility in setting targets and deferring amounts. They now know all too well what they have to do. Any prescriptive code on pay on this point, while it might appeal to certain investor groups and chime politically, is not a rational answer. If it is implemented, deferral may ultimately prove a more expensive way of dealing with this long-term challenge at a time when a credible package needs to be constructed for senior management to drive the sector forward.
Nicholas Stretch is a partner and head of employee incentives at CMS Cameron McKennaReuse content