Best practice | Pay caps


“High bonuses are an effect not a cause of excessive risk-taking by banks. It is the fact banks have been allowed to become too big to fail


that has increased their risk appetite.” Kent Matthews, Cardiff Business School


more competitive, more powerful it was seen. And part of the economic rent you earn from being big and powerful is you know there is a safety net underneath when risk-taking fails.” Given a “no bailout” policy is not credible, and in


the absence of rules to separate out the risky parts of banking, it’s the new controls on capital, liquidity and leverage that stand most chance of curbing high risk-taking and high bonuses. And there is certainly some evidence that


new capital controls are changing attitudes to risk and pay in the City. Many organisations have introduced deferred reward and claw-back schemes to deter reckless risk-taking and over 55% of staff either received no bonus or a reduced bonus this year, according to a Hay Group survey. Meanwhile the Towers Watson poll found most financial service organisations (56%) are now looking to rewards other than money to offset the impact of lower bonuses and revealed an interesting and significant organisational shift away from banks buying or poaching talent to growing, retaining and engaging their own. “Some will do it (offset bonus caps)


through higher fixed pay or increased pension contributions, but many companies are planning to invest in training and career development, healthcare and flexible working programmes,” says Mark Shelton, managing director of the talent and reward practice at Tower Watson. Others argue, however, that little has changed


in the City, pointing not only to the large bonuses paid this year to the bosses of taxpayer-funded


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banks like RBS but also to the huge salaries earned by senior managers in non-revenue earning roles, such as the £1.3m pay package allegedly offered to head of corporate affairs, Matt Young, at bailout bank Lloyds. Even claw-backs appear have no teeth, says


HPC’s Hildyard. “Look at the Co-op. Here is a bank on the brink of going to the wall yet its executives still received performance bonuses. If you can’t claw-back a bonus in these circumstances, when can you? Pay in financial services has got out of control and rewards are disproportionate to the employees’ hard work, talent and contribution to the economy.” Introducing employee-wide profit-share


schemes, along the lines practiced by John Lewis and Swedish bank, Handelsbanken, elected employee representation on the remuneration board and transparency on the pay ratios between banks’ highest and lowest earners, are some of the interventions the HPC recommends to harness the worst excesses of City pay. But Sjöström at Hay Group is sceptical that


tinkering with how banks determine pay or structure rewards will change much. “The problem is cultural. In 2007, the bank that provided a perfect example of what rewards should look like, along lines now proposed by regulators, was Lehman Brothers. Salaries didn’t rise fast, bonus targets were leading edge, incorporating employee and strategic objectives and earnings were deferred, sometimes until retirement. What was missing was a culture that minimised risk.” The challenge facing banks today, says


Sjöström, is to define their offering in a new business reality shaped by scarcer capital, the threat of competition from new entrants and low levels of public trust and to create a culture that supports it. “Banks need to win back trust. That rests on offering a good business model which is clear in purpose and direction and allows for balanced risk and banks being clear about who they are and how they operate. It also requires changes in leadership behaviour and how people act. Compensation can help this but can’t drive it.” n


Best Execution | Summer 2013


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