Both the French President Nicolas Sarkozy, and Germany’s President Horst Köhler, have called for greater regulation to curb “excessive executive pay”.

Recently, we reported the conclusion of the world’s bank regulators that banker pay contributed to the credit meltdown, and that some of the remedies to ensure another meltdown will not occur in future may require regulation (see HERE).

Shortly after we reported this, Hector Sants, the chief executive of the UK Financial Services Authority (FSA), stated that it will increase its scrutiny of the risks posed by remuneration arrangements when assessing financial institutions, and suggested that investors should do likewise. In a speech at the Investment Management Association’s AGM dinner (see HERE) Sants said that remuneration structures that delivered immediate rewards whilst avoiding any downside posed a risk to shareholders and that remuneration should be structured so that risks are shared. He said:

“There are various ways of achieving this goal, such as deferred compensation with claw back and the increased use of share options. None, however, is perfect, but I do believe Boards and shareholders need to carefully consider the incentive structures in place in their companies and their propensity to encourage risk. I know many of you already do this, but I ask you to increase your focus on this critical issue. From the regulatory point of view, it is not our role to dictate the quantum of individual remuneration, that is for the market, but we do need to consider the implication of remuneration structures when judging the overall risk of individual institutions. We will do this with increased intensity.”

The FSA chief’s comments come in the wake of wider concern about the behaviours that may be encouraged by remuneration incentives within financial institutions.

Governor of the Bank of England, Mervyn King, recently criticised bank pay, whilst UBS admitted in a special audit demanded by shareholders that remuneration arrangements had played a role in its sub-prime write-downs by incentivising the wrong kind of behaviour.

But sanity still prevails in the UK. In the week of 9 June, the UK government said it would not regulate to curb executive pay. This came first from the British Chancellor, Alistair Darling, and was soon followed by the Economic Secretary to the Treasury, Kitty Ussher, MP. In a speech to the British Bankers’ Association conference, London, Tuesday 10 June 2008, she said:

“So we will resist calls for more prescriptive regulation – and while I’m on the subject of regulation, we will also resist the calls that have been made for direct regulation of executive pay. Of course, remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interests of the business and of shareholders – and we don’t support ‘rewards for failure’. And over the last ten years, we have taken steps to improve transparency, and to encourage shareholders to improve accountability. But I’m clear that executive pay is a matter for Boards and shareholders – not for Governments.”

For the full text of her speech see HERE.

However, on the other side of the Atlantic it is likely that, whoever wins the next US presidential election, there will be more pay regulation.  John McCain appealed to populism in an otherwise fairly traditional Republican mix of economic policies with his June 10 proposal to allow shareholders a vote on executive compensation. The “Say on Pay” idea lined McCain up with some unusual allies for a Republican: unions have promoted it heavily, and Barack Obama introduced it into the US Senate in April.  McCain tucked the corporate-pay proposal neatly into the middle of a speech he gave to the National Federation of Independent Business, a small business advocacy group (see HERE).

“For too long, government has been the voice of Big Business, not small business,” McCain said. Referring to recent examples at housing and finance companies, McCain denounced CEOs who left troubled companies and then were “packed off with another 40 or 50 million for the road.” He said that under his proposed reforms, “all aspects of a CEO’s pay, including any severance agreements, must be approved by shareholders.”

As for Australia, we know there is going to be change (see HERE). But we do not yet know the exact form this is going to take.

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