Remuneration: Banks fine-tune their bonus systems
Need to adapt to regulators’ requirements; Measures put in place to account for risk-taking
Critics of excessive bank bonuses, who hoped for an industry revolution as a result of the financial crisis, will undoubtedly be disappointed by the pace and scale of reform over the past two years. There have been restrictions – the more widespread use of mechanisms for the deferral and clawback of bonuses and greater scrutiny of the risks taken to generate revenues – but there have not been audible squeals of pain.
Banks are likely to have to refine their systems for deferred compensation as regulations become more prescriptive about how much bonus should be deferred and in what form. On July 7, the European Parliament approved new rules on bank bonuses that require between 40% and 60% of all bonuses to be deferred for at least three years. In addition, at least half of the total payout must be in the form of shares and contingent capital, funds that can be called upon by the bank if it gets into difficulties.
The rules, which will be interpreted by national financial regulators, also limit upfront cash bonuses to 30% of the total bonus payout, or 20% for "particularly large bonuses". Banks with weaker balance sheets that have preferred to provide a large cash component of deferred compensation, rather than issue new stock, will have to rethink their bonus structures.