Financial Regulatory Forum

Banker pay curbs, clawbacks sought at G20 summit

By Reuters Staff
September 25, 2009

France's President Nicolas Sarkozy and his wife Carla Bruni-Sarkozy arrive at the Phipps Conservatory for an opening reception and working dinner for heads of delegation at the Pittsburgh G20 Summit in Pittsburgh, Pennsylvania, September 24, 2009.     REUTERS/Philippe Wojazer (UNITED STATES POLITICS BUSINESS) By Kevin Drawbaugh and David Ljunggren
PITTSBURGH, Sept 24 (Reuters) – World leaders at the G20 meeting on Thursday closed in on a statement calling for new restraints on banker pay, an issue that became inflammatory during the global financial crisis, but would not endorse specific monetary caps — a deal-breaker for the United States.

Leaders will be urged to approve a number of measures such as clawing back salary for poor performance and paying some bonuses in stock, an official said.

High levels of compensation, which in some cases resulted in top executives of money-losing financial companies reaping tens of millions of dollars in bonuses, have outraged political leaders and are a top target of regulatory reform efforts.

Officials were focused on finding ways to link a bank’s bonus pool and executive compensation more closely to the health of its balance sheet and overall profitability.

Critics say the financial crisis was exacerbated by pay structures that rewarded short-term performance, which encouraged excessive risk-taking.

Key to the formulation of the Group of 20 statement will be input from the Financial Stability Board, a policy-coordinating arm of the G20 nations with the world’s largest economies.

The FSB’s focus is on “deferring bonuses, building in clawbacks if performance deteriorates, focusing bonuses in things like stock”, said a senior Canadian official.

Canada co-chaired an FSB panel on limiting pay. Asked whether the proposals were those of Canada or the FSB itself, the official replied: “This is more what I think you’re going to see coming out of the Financial Stability
Board.”

Before the global financial crisis that erupted last year, and in some cases right through it, a glaring disconnect between pay and performance was on display at many banks, including some rescued by massive taxpayer bailouts.

The Canadian official said the G20 would not impose universal regulations on curbing excessive pay.

“This evening and tomorrow …. we’ll see standards setting out the principles and (suggesting) practical things that can be done to back up these principles. It will be up to each country to implement them,” he said.

The FSB said this month that it would advise G20 nations to prevent banks with low levels of capital from offering large bonuses. An FSB official said the board would issue guidelines at the summit on how firms should structure pay packets.

The guidelines were also expected to cover disclosure of pay levels, deferral and vesting periods on share-related pay, as well as independent oversight.

“Europeans are horrified by banks, some reliant on taxpayers’ money, once again paying exorbitant bonuses,” said European Commission President Jose Manuel Durao Barroso.

“In Pittsburgh, the EU will call for coordinated action to stop this, building on measures already taken in Europe and elsewhere,” he said in a statement before the summit opened.

U.S. President Barack Obama on Wednesday said financial regulation needed strengthening to put an end to the “greed, excess and abuse” that caused the financial crisis.

Earlier calls from some EU leaders, particularly French President Nicolas Sarkozy, for quantitative caps on pay were toned down after U.S. officials made clear that such an approach was not politically feasible.

The G20 adopted high-level principles in April to stop remuneration packages from encouraging traders and bankers to take excessive short-term risks that could destabilize a firm.

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