Align Banks’ Interest with Those of Bankers
A 2009 set of G20 guidelines throws useful light
It is welcome that the government is considering reform of public sector bankers’ pay, and stock options and bonuses are being examined. Banking culture has to change dramatically, particularly in the public sector, and the only way to attract and retain top talent is to reward them as well as alternative employment would. Bankers would abandon underhand methods of enriching themselves if open, transparent mechanisms are instituted, to reward them for sound decisions and the hard work that must necessarily precede the hard work.
It would be useful for the Banks Board Bureau and the government to take on board some guidelines firmed up by the G20 and the Financial Stability Board in 2009 on the subject. There has to be a clear distinction between employees whose work has a material impact on the performance of the bank and the rest. Corporate governance and regulatory and capital adequacy considerations must inform compensation decisions. Banks must disclose compensation decisions — these must be made public and reported to regulators. Two-fifths to three-fifths of the remuneration of senior managers whose decisions have a material impact on the working of the bank must be as a variable component. The variable component should be deferred for at least three years and paid out mostly linked to bank stocks, to align individual and bank interests. Liberal incentives must have not just deferral but also clawback provisions built into them, so that when a time bomb on the banks’ books goes off, those who lit its slow fuse would pay, even long after they have left the bank. Experts and independent reviewers must be engaged to design and monitor bankers’ pay.
It would be useful to bring in similar guidelines for private sector banks, too. That would mean limiting the scope of union-bargaining for pay and allowances to the ranks of the junior staff and workers in departments whose working does not materially affect bank performance. Restructuring bankers’ pay, in other words, calls for expertise, transparency and, above all, political will.