When it comes to attracting executive talent, the playing field between the major banks that have accepted taxpayer money and those that have not — in the United States and in most major financial centers abroad — may be levelling.
At last week's Group of 20 summit in London, the international body agreed on principles governing executive compensation that would apply to banks both foreign and domestic, regardless of whether a bank has obtained taxpayer assistance from government programs and thus been forced to restrict compensation.
"To the degree all banks are under these same rules, those concerns are abated," said Karen Shaw Petrou, managing director at the policy advisory firm Federal Financial Analytics.
The Group of 20, a bloc of finance ministers and central bank governors from the world's largest national economies, last week instructed companies to align their pay incentives with the goals of long-term stability, and they directed regulators in member countries to take a company's pay policies into account when assessing its safety and soundness. The group also said pay practices should promote the recently released principles of the Financial Stability Forum, an international consortium with no regulatory authority but a broadened mandate stemming from last week's meeting.
The forum recommended that boards formulate pay policies independently and take responsibility for monitoring their effectiveness, and it said bonus pools should be linked to overall company performance and shrink or disappear when a company does poorly. The forum also encouraged the use of "claw-back" provisions for bonuses and discouraged the use of golden parachutes, multiyear bonus guarantees and employment contracts that compensate new hires for unvested equity they may have to forfeit at their old companies.
How these principles will be carried out in each Group of 20 country may differ. "There's plenty of room for interpretation," Petrou said. "But our bank regulators and the Treasury will definitely plan for this guidance. They played a strong role in developing it." A Treasury Department spokesman did not return a call seeking comment.
Compensation consultant Pearl Meyer, a senior managing director at Steven Hall & Partners in New York, said adoption of the guidelines in the United States could lead to bonus formulas that better balance individual or department performance goals with companywide goals and could also boost base salaries at banks and financial services companies.
"The concept of low salaries and high incentive pay was based on the desire of the financial community to keep fixed costs down. But what happened was, they kept salaries so low that they were artificial, and people's expectations were that they would receive at least 25% to 30% of their bonuses regardless of how the firm did," Meyer said. "So a lot of incentive compensation in financial services was not truly variable."
Banks already have started moving toward compensation systems that deemphasize short-term gains and encourage long-term growth, said Scott Talbott, the senior vice president of government affairs at the Financial Services Roundtable.
"You've already seen a bigger reliance on restricted stock and longer vesting schedules," he said.
But he questioned the implementation of guidelines that single out financial firms.
"If you apply broad restrictions like these to any one sector of the economy, then you create competitive inequality," he said. "There are other industries that need [the expertise of] financial services guys."
It was unclear how the Group of 20 guidelines will be implemented here, but banking lawyer Frederick Lipman, a partner in Blank Rome LLP in Philadelphia, said that if financial regulators are on board with the recommendations, companies will have little choice but to follow them.
"The idea of having the regulators look at compensation structures as part of the overall risk profile of a bank will be a fact of life in the future," he said.
But U.S. banks that have accepted Tarp or Capital Purchase Program money — and the executive pay restrictions tied to the funds — may find little in the Group of 20 guidelines that would force drastic changes in current practices.
"The rest of the world needs to take note that there have been an awful lot of restrictions placed on banks in the U.S. that were, and are, healthy institutions," said Diane Casey-Landry, chief operating officer of the American Bankers Association. "I thought the point of the principles, really, was to bring everybody else up to our level."
