Banking
CASE STUDY: REMUNERATION IN THE BANKING SECTOR
10th in a series
Conclusion
Eurosif wishes to acknowledge the support and direction provided by the Bank Sector Report Steering Committee: Bank Sarasin Domini Social Investments Fundación Ecología y Desarollo (ECODES) IDEAM Living Planet Fund Management Company S.A. Oddo Securities Pictet Asset Management Triodos Bank This sector report has been compiled by :
La ruche - 84 quai de Jemmapes • 75010 Paris, France Tel : +33 (0)1 40 20 43 38 contact@eurosif.org • www.eurosif.org
9 quai Paul Doumer • 92920 Paris La Défense France Tel: +33 1 41 89 74 69 svoisin@cheuvreux.com • www.cheuvreux.com
September 2009
shown in Chart 2, banks have been significantly impacted by the crisis; in some cases, losses have approached their required Tier 1 capital levels. Thus, world and EU leaders utilised the G20 summits to push for tighter rules. Nevertheless, should the current regulation efforts fail to shift banks' models towards an approach favouring stable economic growth, the ultimate threat is a Glass-Steagall1 type of reform. Bank performances should now be primarily assessed in relation to risk profiles and be more focused on the long term. ●
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to charge the right price for credit. Using lending for client acquisitions distorts a key function of commercial banking, as price cannot guide capital allocation. The apparent aggregation of commercial and investment banking allows for crosssubsidisation between lending and needs to be reassessed. ●
Investment Banks. Investment banks are highly sensitive to market cycles and volatility. (Human) capital, funding and liquidity are the key features embedded in a structured risk management model. This industry will be the most profoundly affected by a tighter regulatory environment, and this will lead to lower leverage and ultimately higher capital charges, which will structurally lower return on equity levels.
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Wealth Management. This model could change, with two drivers
Retail Banks. The crisis has increased concentration and market
strength for retail banks, which are highly exposed to economic cycles. However, the crisis context has also led to reduced pressure from the European Commission's (EC) antitrust rules and consumer protection laws. Players such as telecom companies, media groups and retailers are showing renewed interest in providing financial services. Chart 1: Top 20 European Banks - Market cap vs total assets (2008) 140 000
Commercial Banks. A key issue is the ability of commercial banks
being introduced: 1) segregation between asset managers (AM) and networks; and 2) the separation of passive and active AM, which should help clients select the right product at the right price. Chart 2: Cost of the Crisis
3 000 000
120 000
2 500 000
100 000
2 000 000
80 000 1 500 000 60 000 1 000 000
40 000
Total Assets ( m) 2008
Particularly bonuses paid to traders who are able to take on significant risks. The proposed revision of IAS 39 would also allow bonus pools paid to traders to be triggered only if the trade was priced at market value as this would ensure that the P&L was eligible for immediate bonus payments.
Stronger financial regulation is high on the world agenda. As
500 000
20 000 0
0
Sa old in nt an gs de P Pa r S rib A as BB S VA Ba A (B an rcl co ays Bi lb ao ) U BS U C re nic re AG di di tS In tS u te is s se pA R oy a S G a a r Ll oy l Ba npa oup ds ol nk Ba O oS pa nk f S c in ot g la nd So Gro up ci e St PL an te G C da e rd ner a C ha le C rt re e di t A red gr N ic or D eu de ole ts a ch Ba N at e io Ba nk na nk lB an Sb AG k of erb Sv an G en D k an ree sk sk ce a H S an e B an A de k ls A ba nk /S en AB
7
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BN
The UK government has requested that the bulk of the bonus pool (GBP950m) paid to executives at RBS in 2008 be in the form of subordinated debt rather than capital and that this should be staggered over three years with a 100% claw-back provision.
BANKING TRENDS
Market Cap. ( m)
6
Four major bank business profiles have been identified: - Retail Banks (RB) refer to banking institutions that handle transactions directly with consumers, rather than with corporations or other banks. This is a very mature business in Europe, and contributes to over 50% of European banks’
profits. Key drivers in this sector are loyalty and mobility. - Commercial Banks (CB) carry out traditional corporate lending activities and credit facilitation through a wide range of products. This is a competitive business segment that is highly exposed to economic cycles where access to capital and geographical representation are key issues. - Investment Banks (IB) carry out all financial market-related activities notably trading in securities, managing corporate mergers and acquisitions, originating, underwriting and syndicating both equity and debt, and insuring bonds (e.g. selling credit default swaps). - Wealth Management (WM) is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services.
H
Credit Suisse's (CS) plan does not include a malus/bonus system but uses debt rather than capital to remunerate employees. Under CS's scheme, employees of the Investment Banking business will receive the majority of their deferred bonuses in the form of partner asset facility awards (PAF). The PAF awards are indexed to a specified pool of illiquid assets based on the most illiquid loans and bonds on Credit Suisse's balance sheet. PAF holders will realise potential gains if assets in the pool are liquidated at prices above the initial fair market value. However, PAF holders cannot receive any payments for at least five years after the awards are granted, at which point participants will receive an annual cash payment.
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sb c
However, despite the new momentum, a consensus on limiting bonuses may not be achievable and it is possible that the most viable solution may come via tougher controls on capital requirements and a formal consensus on requiring bonuses to be based on long-term performance. This would allow national regulators to use Basel II to require financial institutions that continue to operate inappropriate remuneration policies that encourage unnecessary risk to set aside additional capital. The linking of risky remuneration practices to increased capital requirements would be a direct incentive for boards to implement long-term-oriented and sensible remuneration polices. However, defining relative risk tolerance levels will remain a key challenge.
The European Banking sector consists of 6,600 banks, with total assets of more than €23 trillion. The top 300 listed banks represent nearly 80% of the sector and account for about 15% of the major European index benchmarks. Banks directly account for about 5% of European GDP, their indirect impact is 50% and they are a key contributor to employment, growth and stability across the European Union. Chart 1 reflects their importance to the economy by showing the market capitalisation and total assets for the top 20 European banks.
H
Remuneration Example – Credit Suisse
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o
Both President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany have publically stated their view that unlimited bonuses contributed to the excessive risk taking by banks and there is now growing impetus for greater international coordination to establish a common consensus on how bonuses are paid. The G20 summit in Pittsburgh in September 2009 thus offers an opportunity for France and Germany to convince the world's largest economies that mandatory bonus limits are needed to prevent the continuation of excessive risk taking by banks.7
his Eurosif sector report has been compiled using research by CA Cheuvreux. It describes the major environmental, social and governance (ESG) challenges facing the European banking industry and the associated risks and opportunities these pose for long-term returns.
BANKING OVERVIEW
nc
UBS's new model tackles head-on the primary issue for any reform of bank's remuneration policies, namely the payment of bonuses based on performance that is neither transparent nor sustainable over the long term. The new plan introduces a bonus/malus system under which a maximum of one-third of the bonus can be paid out in cash at year-end, subject to positive business development. The remainder will be held for five years in escrow in a bonus account. Should UBS's subsequent performance be poor, a negative award, or "malus", can result and the bonus account will decline, reducing any subsequent awards paid out.
T
Ba
Remuneration Example - UBS
In our view, both shareholders and regulators should welcome the Credit Suisse plan, as it potentially removes risky assets from the balance sheet and preserves capital, while introducing this risk directly into executive pay over the long term. Furthermore, long-term participants have the opportunity to gain some upside in the event that the toxic assets6 return to value. Both the UBS and Credit Suisse remuneration structures have raised the bar in terms of challenging remuneration committees to meet the needs and objectives of shareholders and regulators. However, while we welcome these two remuneration plans, we are concerned by the potential lack of incentives for independent banks to adopt similar policies.
Designer: Catsaï - www.catsai.net / The views in this document do not necessarily represent the views of all Eurosif member affiliates. This publication should not be taken as financial advice or seen as an endorsement of any particular company, organisation or individual.
The financial crisis exposed the inherent weaknesses of the remuneration system used by banks. This system rewarded executives for behaviour that encouraged excessive risk-taking in order to earn bonuses that were dependent on an assessment of short-term performance which failed to account for long term risks. However, given the EU's failure to adopt a coordinated approach to the issue of remuneration, the best path to reform may in fact be market-based, with shareholder and government involvement where necessary. In our view, UBS and Credit Suisse's recent implementation of remuneration policies designed to encourage long-term performance supports this argument.
Market Cap.
1 The
Total Assets
Glass-Steagall act was a 1933 United States national law separating investment banking and commercial banking firms.4/5 http://www.marisec.org/shippingfacts/worldtrade/
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ISSUES ●
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Risk management and transparency (CB & IB). It is essential to measure board expertise and accountability in order to ensure that the appropriate level of expertise is in place to manage State-driven funding and risk control. Furthermore, the movement towards increased EU-level regulation and supervision of hedge funds and tax havens is evidence of the shift towards more transparency.
The systemic risk of product responsibility (RB, CB & IB) is illustrated via sales practices that may push lenders to hand out money without properly assessing borrowers' ability to pay it back, as highlighted by the US sub-prime mortgage crisis. Tax havens and banking secrecy (WM, CB & IB). Long considered as the black hole of the economy, tax havens and banking secrecy practices are now under strong regulatory pressure.
Customer retention and satisfaction (Retail) is a key intangible asset for major banks, especially in the context of regulatory pressure for price transparency and client mobility. However, the level of clients’ capital is difficult to measure due to the lack of relevant reporting on dedicated key performance indicators (KPIs). Pricing premiums, in the context of regulatory pressure, could become an important indicator of performance.
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The commitment to transparency (All) requires providing stakeholders with consistent and relevant disclosure and being receptive to their needs for specialised information. Commercial confidentiality should not be used as an excuse to deny stakeholders access to information.
Access to credit and credit database transparency (Retail). These are key performance indicators of a bank’s contribution to qualitative economical growth. Some banks may allow people in low-income brackets access to financial services. Furthermore, facilitating cross-border access to credit databases may improve access to finance for some categories of borrowers. However these databases do not necessarily result in a more responsible credit and financial market.
The indirect environmental impact of banks’ activities is far greater than the direct impact. For example scope 3 CO2 emissions4 for the banking sector (e.g. linked to credits) represent a large proportion of the direct and indirect carbon footprint of all other sectors. Environmental impact of business (CB & IB) can be mitigated by considering externalities via risk screening and by pricing their fair price in transactions. The Equator Principles, the Principles for Responsible Investments (for WM) and the more recent Climate Principles5 represent advanced indicators for measuring the
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Systemic ESG Issues
Risk Control and Transparency
Systemic ESG issues
Responsible Lending & Financial Product Distribution
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State aid counterparties (All). The conditions that accompany any state aid measures must be clear and transparent in order to allow the market to understand the expected labour-related concessions. Banks that are bailed out by governments cannot, in some cases, lay off employees at the same time as paying a dividend to shareholders.
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The commitment to ‘do no harm’ (WM, CB & IB) means preventing and minimising the detrimental environmental and/or social impact of portfolios and operations. Solutions in this respect require the creation of policies, procedures and standards based on the precautionary principle in order to minimise environmental and social harm, improve social and environmental conditions where banks and their clients operate and avoid involvement in transactions that undermine sustainability.
Managing ageing (Retail). Managing the reversed age pyramid in the sector is a challenge that can be tackled by ensuring the long-term employability of staff (including trainees), as well as transmitting experience to the new generation of employees.
The Lamfalussy Process is an approach to the development of financial service industry regulations used by the European Union. It is composed of four "levels," each focusing on a specific stage of the implementation of legislation. http://ec.europa.eu/internal_market/securities/lamfalussy/index_en.htm 3 A Tobin tax is a tax on foreign currency exchanges. Named after the economist James Tobin, the tax is intended to put a penalty on short-term speculation in currencies.
Trading activities. Capital used for trading activities rather than credit businesses may be subject to further control and requirements and ultimately, the EU may see some sort of Tobin tax3 to pay for the systemic risk embedded in these activities.
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Banking secrecy rules: The G20 endorsement of the OECD list of countries compliant with international tax disclosure requirements may put pressure on profitability and could lower the value of some wealth management segments.
A shift in banking services towards improved consumer benefits? The EU Commission, Parliament and industry are currently discussing how to improve consumer protection and choice in retail banking and insurance services.
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Complex hybrid financial products. Control of and transparency on derivatives and complex structured products are key steps towards ensuring financial stability.
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While CSR performance in this sector is seldom taken into account by clients as a factor determining their choice of retail bank, pricing and the quality of service remain key in terms of appeal for customers.
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However, implementing CSR measures may be a tangible means of retaining customers over time.
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Banks' tighter credit standards, despite government intervention, have contributed to the substantial macroeconomic slowdown and an increase in corporate defaults. The credit situation, however, is likely to stabilise.
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Staff costs (CB, IB & WM) are being scrutinised as there is potential room for improvement after five years of solid hiring. However, the favourable ageing pyramid could offset both the labour-related impact and the cost of restructuring.
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Credit cycle: this is one of the most significant downturns in credit cycle history, albeit to a lesser extent in Europe. Constrained capital bases and deleveraging are likely to tighten credit terms. However, banks are set to receive further support from national regulators to improve access to credit locally. For example, credit to local businesses is to be excluded from the calculation of leverage ratios.
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Microfinance only represents a fraction of European banks' activities and, although some banks are active in this field, this segment cannot, at this stage, be a substitute for the traditional credit model with regards to improving access to credit.
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Reputational risk is viewed as one of the drivers for investment and commercial banks to further consider the environmental and social impact of their transactions. Proactive management can thus help anticipate future regulation.
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Implementation of environmental and social risk screening may affect corporate relationships and business volumes in the short term, specifically in project finance, export finance and potentially corporate finance when the use of proceeds is known. Nevertheless, it reduces banks' legal and financial
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Restructuring is likely to be scrutinised by governments for banks that have benefited from state aid, thus potentially increasing the cost of any layoff plans.
Specific ESG Issue
Social Impact
Systemic & Specific ESG Issue
Specific ESG Issue
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Stakeholder Satisfaction
Environment Management
further constrained capital bases and ongoing deleveraging. Leveraging ratios will be more limited in the future to prevent systemic risk –a sustainable limitation may be within the 2025% range. Capital requirements for trading activities will be dramatically increased.
Capital requirements. EU legislative proposals to address liquidity risk and excessive leverage (Autumn 2009) will lead to
Civil society campaigns (WM, CB & IB) aimed at engaging banks’ civil responsibility (e.g. regarding investments in companies that manufacture cluster bombs) highlight the leverage that financial institutions have to facilitate international agreements and their responsibility in protecting civilians in developing countries.
implementation of a consistent approach. This may lead to best-in-class and exclusion policies being created on the basis of these principles.
Supervisory rules. A post G20 summit rolling programme of regulatory processes should establish a more consistent set of supervisory rules. The Financial Stability Board (FSB) is to become the G20 arm for enhancing and enforcing prudential and governance rules. In addition, in May 2009, the EC issued a communication outlining a proposal for stronger European financial supervision.
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Specific ESG Issue
redundancy trend, with substantial labour-related consequences in the UK (a cut of about 5% in total banking headcount) as well as the Netherlands and Spain.
Restructuring and relocation of jobs (All). EU banks have shifted rapidly from being major recruiters to a slightly negative
Human capital attraction and retention (All). Banks’ ability to attract, retain and motivate employees can be measured through: 1) remuneration policies; 2) employee productivity; and 3) culture and training. Post crisis, the banks sector has become less appealing for new recruits to work in and is likely to suffer as a result.
2
Democratic accountability (RB, CB & IB). Improving the EU's Lamfalussy approach2 and its extension to banking is a key element in achieving the dynamic global economy anticipated in the Lisbon treaty.
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Responsible remuneration (RB, CB & IB). Variable remuneration (bonus), along with unsustainable business targets, may lead to irresponsible commercial practices. This is a key issue that is being addressed by regulators but has been tackled by some banks, such as UBS and Credit Suisse. (see case study on innovative remuneration plans at the end of this report)
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The Banks’ license to operate lies with their social responsibilities in facilitating the financing of the economy through lending to retail and corporate banks. It also has indirect consequences on employment.
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Customer protection issues (RB & WM) include pricing, transparency, cost of products, banking mobility, advertising and marketing of credit products, pre-contractual information to be provided, ways to assess product suitability, borrower creditworthiness, advice standards, responsible borrowing and issues relating to the framework for credit intermediaries (e.g. disclosure, registration, licensing and supervision).
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The crisis has revealed the importance of the systemic responsibilities for Retail, Commercial and Investment Banks. A major sustainable objective is to prevent these risks from spreading from a specific bank to the entire sector and to the rest of the economy. In terms of ESG research, it calls for specific screening of systemic vs. specific risks.
BUSINESS RISKS & OPPORTUNITIES
KEY CHALLENGES
Human capital management 4 5
liability and exposure to reputational risk and builds a positive image that partly offsets post-crisis image disaffection for banks. ●
The cost of implementing ESG risk screening measures is marginal while relevant models are far from being standardised. Further integration into risk models affecting Basel ratios will probably not be immediate.
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There will most likely be pressure on operating costs while visibility on earnings and balance sheets is improving. Operating expenses are likely to be kept under tight control during the downtrend in the credit cycle, limiting both job opportunities and skill development.
Scope 3 emissions include all indirect emissions. The latter stem from sources that are not owned or controlled by a company, but which occur as a result of its overall activity. www.equator-principles.com, www.unpri.org, www.theclimateprinciples.org
Banking
CASE STUDY: REMUNERATION IN THE BANKING SECTOR
10th in a series
Conclusion
Eurosif wishes to acknowledge the support and direction provided by the Bank Sector Report Steering Committee: Bank Sarasin Domini Social Investments Fundación Ecología y Desarollo (ECODES) IDEAM Living Planet Fund Management Company S.A. Oddo Securities Pictet Asset Management Triodos Bank This sector report has been compiled by :
La ruche - 84 quai de Jemmapes • 75010 Paris, France Tel : +33 (0)1 40 20 43 38 contact@eurosif.org • www.eurosif.org
9 quai Paul Doumer • 92920 Paris La Défense France Tel: +33 1 41 89 74 69 svoisin@cheuvreux.com • www.cheuvreux.com
September 2009
shown in Chart 2, banks have been significantly impacted by the crisis; in some cases, losses have approached their required Tier 1 capital levels. Thus, world and EU leaders utilised the G20 summits to push for tighter rules. Nevertheless, should the current regulation efforts fail to shift banks' models towards an approach favouring stable economic growth, the ultimate threat is a Glass-Steagall1 type of reform. Bank performances should now be primarily assessed in relation to risk profiles and be more focused on the long term. ●
●
to charge the right price for credit. Using lending for client acquisitions distorts a key function of commercial banking, as price cannot guide capital allocation. The apparent aggregation of commercial and investment banking allows for crosssubsidisation between lending and needs to be reassessed. ●
Investment Banks. Investment banks are highly sensitive to market cycles and volatility. (Human) capital, funding and liquidity are the key features embedded in a structured risk management model. This industry will be the most profoundly affected by a tighter regulatory environment, and this will lead to lower leverage and ultimately higher capital charges, which will structurally lower return on equity levels.
●
Wealth Management. This model could change, with two drivers
Retail Banks. The crisis has increased concentration and market
strength for retail banks, which are highly exposed to economic cycles. However, the crisis context has also led to reduced pressure from the European Commission's (EC) antitrust rules and consumer protection laws. Players such as telecom companies, media groups and retailers are showing renewed interest in providing financial services. Chart 1: Top 20 European Banks - Market cap vs total assets (2008) 140 000
Commercial Banks. A key issue is the ability of commercial banks
being introduced: 1) segregation between asset managers (AM) and networks; and 2) the separation of passive and active AM, which should help clients select the right product at the right price. Chart 2: Cost of the Crisis
3 000 000
120 000
2 500 000
100 000
2 000 000
80 000 1 500 000 60 000 1 000 000
40 000
Total Assets ( m) 2008
Particularly bonuses paid to traders who are able to take on significant risks. The proposed revision of IAS 39 would also allow bonus pools paid to traders to be triggered only if the trade was priced at market value as this would ensure that the P&L was eligible for immediate bonus payments.
Stronger financial regulation is high on the world agenda. As
500 000
20 000 0
0
Sa old in nt an gs de P Pa r S rib A as BB S VA Ba A (B an rcl co ays Bi lb ao ) U BS U C re nic re AG di di tS In tS u te is s se pA R oy a S G a a r Ll oy l Ba npa oup ds ol nk Ba O oS pa nk f S c in ot g la nd So Gro up ci e St PL an te G C da e rd ner a C ha le C rt re e di t A red gr N ic or D eu de ole ts a ch Ba N at e io Ba nk na nk lB an Sb AG k of erb Sv an G en D k an ree sk sk ce a H S an e B an A de k ls A ba nk /S en AB
7
●
BN
The UK government has requested that the bulk of the bonus pool (GBP950m) paid to executives at RBS in 2008 be in the form of subordinated debt rather than capital and that this should be staggered over three years with a 100% claw-back provision.
BANKING TRENDS
Market Cap. ( m)
6
Four major bank business profiles have been identified: - Retail Banks (RB) refer to banking institutions that handle transactions directly with consumers, rather than with corporations or other banks. This is a very mature business in Europe, and contributes to over 50% of European banks’
profits. Key drivers in this sector are loyalty and mobility. - Commercial Banks (CB) carry out traditional corporate lending activities and credit facilitation through a wide range of products. This is a competitive business segment that is highly exposed to economic cycles where access to capital and geographical representation are key issues. - Investment Banks (IB) carry out all financial market-related activities notably trading in securities, managing corporate mergers and acquisitions, originating, underwriting and syndicating both equity and debt, and insuring bonds (e.g. selling credit default swaps). - Wealth Management (WM) is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services.
H
Credit Suisse's (CS) plan does not include a malus/bonus system but uses debt rather than capital to remunerate employees. Under CS's scheme, employees of the Investment Banking business will receive the majority of their deferred bonuses in the form of partner asset facility awards (PAF). The PAF awards are indexed to a specified pool of illiquid assets based on the most illiquid loans and bonds on Credit Suisse's balance sheet. PAF holders will realise potential gains if assets in the pool are liquidated at prices above the initial fair market value. However, PAF holders cannot receive any payments for at least five years after the awards are granted, at which point participants will receive an annual cash payment.
●
sb c
However, despite the new momentum, a consensus on limiting bonuses may not be achievable and it is possible that the most viable solution may come via tougher controls on capital requirements and a formal consensus on requiring bonuses to be based on long-term performance. This would allow national regulators to use Basel II to require financial institutions that continue to operate inappropriate remuneration policies that encourage unnecessary risk to set aside additional capital. The linking of risky remuneration practices to increased capital requirements would be a direct incentive for boards to implement long-term-oriented and sensible remuneration polices. However, defining relative risk tolerance levels will remain a key challenge.
The European Banking sector consists of 6,600 banks, with total assets of more than €23 trillion. The top 300 listed banks represent nearly 80% of the sector and account for about 15% of the major European index benchmarks. Banks directly account for about 5% of European GDP, their indirect impact is 50% and they are a key contributor to employment, growth and stability across the European Union. Chart 1 reflects their importance to the economy by showing the market capitalisation and total assets for the top 20 European banks.
H
Remuneration Example – Credit Suisse
●
o
Both President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany have publically stated their view that unlimited bonuses contributed to the excessive risk taking by banks and there is now growing impetus for greater international coordination to establish a common consensus on how bonuses are paid. The G20 summit in Pittsburgh in September 2009 thus offers an opportunity for France and Germany to convince the world's largest economies that mandatory bonus limits are needed to prevent the continuation of excessive risk taking by banks.7
his Eurosif sector report has been compiled using research by CA Cheuvreux. It describes the major environmental, social and governance (ESG) challenges facing the European banking industry and the associated risks and opportunities these pose for long-term returns.
BANKING OVERVIEW
nc
UBS's new model tackles head-on the primary issue for any reform of bank's remuneration policies, namely the payment of bonuses based on performance that is neither transparent nor sustainable over the long term. The new plan introduces a bonus/malus system under which a maximum of one-third of the bonus can be paid out in cash at year-end, subject to positive business development. The remainder will be held for five years in escrow in a bonus account. Should UBS's subsequent performance be poor, a negative award, or "malus", can result and the bonus account will decline, reducing any subsequent awards paid out.
T
Ba
Remuneration Example - UBS
In our view, both shareholders and regulators should welcome the Credit Suisse plan, as it potentially removes risky assets from the balance sheet and preserves capital, while introducing this risk directly into executive pay over the long term. Furthermore, long-term participants have the opportunity to gain some upside in the event that the toxic assets6 return to value. Both the UBS and Credit Suisse remuneration structures have raised the bar in terms of challenging remuneration committees to meet the needs and objectives of shareholders and regulators. However, while we welcome these two remuneration plans, we are concerned by the potential lack of incentives for independent banks to adopt similar policies.
Designer: Catsaï - www.catsai.net / The views in this document do not necessarily represent the views of all Eurosif member affiliates. This publication should not be taken as financial advice or seen as an endorsement of any particular company, organisation or individual.
The financial crisis exposed the inherent weaknesses of the remuneration system used by banks. This system rewarded executives for behaviour that encouraged excessive risk-taking in order to earn bonuses that were dependent on an assessment of short-term performance which failed to account for long term risks. However, given the EU's failure to adopt a coordinated approach to the issue of remuneration, the best path to reform may in fact be market-based, with shareholder and government involvement where necessary. In our view, UBS and Credit Suisse's recent implementation of remuneration policies designed to encourage long-term performance supports this argument.
Market Cap.
1 The
Total Assets
Glass-Steagall act was a 1933 United States national law separating investment banking and commercial banking firms.4/5 http://www.marisec.org/shippingfacts/worldtrade/