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[ 2010-06-15 ]

Bonuses ¡¥should be delayed for a decade¡¦
Future of Banking Commission goes much farther than FSA by
recommending long-term incentives for investment bankers

London (UK) ¡V 14 June 2010 ¡V The Times - Investment
bankers should be forced to wait ten years to cash in their
bonuses in full, under radical proposals tabled by a
cross-party commission set up in the wake of the banking

The Future of Banking Commission, whose members include the
Business Secretary Vince Cable, argued that remuneration
structures needed to be ¡§far longer-term in nature¡¨ and
aligned with the creation of value for shareholders over a
five or ten-year period.

The recommendations on top City pay go much farther than
those of the Financial Services Authority, which envisages
bonuses being spread over three years for senior bankers.
Until recently, there were no deferral elements at all in
most City bonuses, with most paid in full in cash at the end
of the bank¡¦s financial year.

The commission, which was chaired by David Davis, the
Conservative MP, said that drastic change was needed and
that even remuneration proposals set out by the G20¡¦s
Financial Stability Board did not go far enough in
eliminating rewards for taking short-term risks. It said
that bonuses should be linked to ¡§return on assets and the
creation of sustainable long-term absolute shareholder value
over a five and ten-year period¡¨.

The drastically lengthened deferral period was backed by the
late Sir Brian Pitman, former chairman of Lloyds TSB and one
of the few City bankers to emerge from the crisis with his
reputation intact. Sir Brian, shortly before his death, told
the commission that he still saw ¡§people coming forward
with remuneration systems which will pander to the chief
executive for high rewards, not for creating shareholder
value, but from some other measurement which will be much
easier to achieve than long-term shareholder value, and
we¡¦ve got to get people to stop behaving in that way¡¨.

Making senior bankers wait ten years to cash in their
bonuses in full would cause a storm in the City. Even the
most conservative senior executive share schemes vest after
five years and the majority after three years. Proponents of
such long-term schemes argue that it is only after such long
periods that it is possible to be sure that the supposed
value created by a senior executive is real and lasting and
not the product of a bubble or a reckless bet.

Critics of the existing system say that executives at
institutional investment groups, who might be expected to
push for this approach, have been timid because they are
rewarded in exactly the same flawed but lucrative way.

Amid a string of 39 recommendations, the commission also
proposed banning incentives aimed at getting branch staff at
banks to sell more products. Instead, it says that branch
staff bonuses should be paid only for increasing customer

Any such ban would affect potentially tens of thousands of
frontline staff, who can boost their base pay by up to 40
per by selling products such as loans, payment protection
insurance and investment products.

Peter Vicary-Smith, chief executive of Which? and a member
of the commission, said: ¡§Consumers are sick to death of
going into a branch to set up an ISA and someone tries to
sell them pet insurance.¡¨

The commission supported the Volcker proposals, which call
for the separation of investment banking from retail
banking, but went further, saying banks that advise clients
should be prohibited from trading any form of securities.

Although the commission was independent of the Government,
it has the blessing of Mr Cable. ¡§He knows what¡¦s in the
report and there¡¦s nothing he wants his name taken away
from,¡¨ Mr Vicary-Smith said.

The way forward?
ľ Create a new class of deposit carrying a 100 per cent
guarantee that can be invested only in safe assets such as
government bonds

ľ Prohibit banks that advise clients from trading any form
of securities and separate corporate advice from investor

ľ Crack down on deriviatives trading by improving

ľ Restructure banks so that if they fail they do not cause
catastrophic damage to system

ľ Beef up consumer protection and put depositors ahead of
other creditors in the event of liquidations

ľ Align senior City bonuses with five to ten-year time
horizons of shareholders

ľ Ban sales incentives for branch staff

ľ Link bonuses to non-financial targets, such as customer
satisfaction and complaints handling

ľ Oblige Government to use its Lloyds and Royal Bank of
Scotland stakes to push for reforms

ľ Introduce a new bank professional standards body similar
to medical and legal bodies to ¡§strike off¡¨ bad apples

Goldman Sachs came in for particular scrutiny by the Future
of Banking Commission after it emerged that the world¡¦s
leading investment bank might be tempted to put aside
ethical considerations. The report quoted Goldman¡¦s ethics
code, which says that integrity and honesty should be at the
heart of everything it does and that it expects high ethical
standards from everybody.

The report adds: ¡§But Goldman Sachs, rather ominously, adds
a rider: ¡¥From time to time, the firm may waive certain
provisions of this code.¡¦¡¨

The commission said: ¡§The banking industry is in a dilemma
when it comes to culture and values. It knows how it should
behave but it also knows that in its complex, competitive
and conflicted modern environment, it cannot live up to the

A spokesperson for Goldman said: ¡§Sarbanes-Oxley requires
virtually every public company in the US to have a Code of
Ethics, and the waiver is part of the Code. Goldman Sachs
has never received a request for, or issued, a waiver.¡¨

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