Align Banks’ In­ter­est with Those of Bankers

A 2009 set of G20 guide­lines throws use­ful light

The Economic Times - - The Edit Page -

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.

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