With the meltdown of the financial industry, bankers are finding many of their golden parachutes in the recycling bin. But does this mean permanent change in the way banks arrange compensation packages for their best and brightest? HRM looks at how bankers are being paid and asks which bank will be first to make lasting changes
Early last year, Vikram Pandit, CEO, Citigroup, initiated a discussion on compensation packages at the top end of the global banking industry. He said it was essential to consider three principles, "transparency, systematic oversight and a level playing field", when it came to banker remuneration. "These are the essential elements we need to consider as we look at how best to frame these reform discussions."
What began as a theoretical discussion however, is now suffering a large dose of reality. The financial crisis has hit the banking industry particularly hard, with CitiGroup itself forced to retrench 52,000 staff worldwide. It has also accepted a US$306 billion guarantee from the US Federal Government to stop it falling immediately into bankruptcy.
Locally, DBS Bank has hit turbulence, with around 900 retrenchments taking place late last year. And throughout the world of finance, professionals have headed into the New Year nervous of more bad news.
That will certainly put pressure on any hoped-for salary increases among lower and middle management levels, but what about those at the highest points of the corporate ladder? Will their benefits be cut along with broader organisational costs during the current downturn?
Pandit's package is still worth around US$3 million a year. It's a significant sum but there are higher fliers out there, at least when compensation is compared with the output of the business being run. One local source has told HRM banking executives in Asia expect to be paid in the millions. The highest paid banking CEOs in this region earn between 0.06% of their organisation's net income in Thailand to a significantly higher 0.93% in Indonesia.
Those banks are much smaller than multinationals like CitiGroup, but banking CEOs here are still earning significant salaries. Even board members are receiving up to $2.3 million a year.
The current downturn does not seem to have had any immediate impact on these packages. This is despite, as one expert told HRM, the structure of those packages contributing to some of the riskier moves made by banks in the lead up to the current crisis.
Mohit Mehrotra, a consultant with Deloitte Financial Services, says Asian banks have made similar mistakes to their western counterparts. "Compensation packages in Asia are structured to give incentives to staff to pursue risky policies. These remunerations are one of the reasons that Asia is also facing a financial downturn."
I don't want to be first
A recent PricewaterhouseCoopers (PwC) study shows bankers tend to agree that there needs to be reform of compensation packages at the top end. But no bank appears willing to be the first to move. Ron Collard, partner at PwC, says that while reducing the salaries of top executives may help a bank's immediate bottom line, there are fears it could irretrievably damage its employer brand.
"Talent is becoming a more precious commodity and banks are worried about retention and recruitment; if they end up being the only ones to change their compensation structure they may lose their talent."
Fabrice Desmarescaux, an executive recruiter with Spencer Stuart, says banks are unlikely to take a chance on permanent reform. "Yes, in the short term, compensation will decrease dramatically but in the long term compensation in Asia will not change significantly."
Collard says most of the compensation issues currently facing the industry boil down to the way it has been structured. "It does not always enhance shareholder value and there are more pressing needs to change this now in view of developments in today's global economy," he says. "One problem with compensation, for instance, is that bonuses are paid on an annual basis measured on the performance of that year but (the) realisation of returns may be long term. Another issue is that different bonuses were guaranteed and were being used as retention tools. No matter what the employees did, they got their money."
Governments are the new shareholders
Traditionally, shareholders have been loathe to question executive salaries and bonuses. As long as their dividends came through, and share prices grew, there was little reason to rock the boat. But the financial crisis has brought new players into the picture. Several governments, including the US and UK's, have invested heavily in banking stocks to ensure they stay afloat during the credit crunch. That has earned them influence at the boardroom level and there is speculation they may use that to reign in corporate salaries.
The US Government has already agreed to impose limits on the remuneration of senior executives who have benefited from government assistance. And in the UK, the national Government has talked to 40 of the biggest banks asking them to review their compensation system against a set of ideal' practices.
Collard believes that it is important to ensure that any reforms will stick. He says the best way to do this is for governments and taxpayers to stay involved. "Taxpayers are putting in lots of money and how they will react will determine how compensation reforms evolve."
While local banks have been able to keep a low profile during the current economic turmoil, multinationals such as UBS, which received funds from the Swiss Government, have had no choice but to stay in the limelight.
UBS has announced a new bonus scheme that does away with the concept of annual bonuses. Its top executives will now receive only up to one third of each year's bonus at the end of the year in question. The rest will be put aside and only awarded if the bank and the employee perform well in subsequent years.
The change, in line with the Institute of International Finance's Best Practices' report, aims to discourage excessive risk-taking and better align employee incentives with the long-term interests of the corporation. It is expected to affect around 2,000 of UBS' 80,000 employees.
Future compensation trends
Desmarescaux believes that if changes occur, they should only happen to avoid selfish compensation. "The problem banks are having with risk management is that they are not good enough," he says. "Yes, it could be because top management (have) ignored risk managers but risk managers need to be strong. You need to manage people so they don't damage your balance sheets."
Mehrotra agrees. "Not only do banks need to consider current remuneration policies in light of current market conditions but they need to avoid bad practices concerning performance measurement, remuneration, composition and corporate governance."