It seems everyone has a view on banker executive remuneration
01/11/2008
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Last month we alerted subscribers to the government’s thinking on banker pay regulation with Prime Minister Rudd’s address to the UN (see HERE) after first warning that this may be coming back in May (see HERE).

Since then Mr. Rudd has reiterated his ideas (see his speech at the Australian Industry Group meeting on 17 October HERE and his radio interview HERE). Treasurer Wayne Swan has subsequently echoed his views in a speech to the Brookings Institute (See HERE) as has the Minister for Superannuation and Corporate Law HERE

Then the IMF lobbed their Financial Stability Report (see HERE), saying authorities should move to:

“Strengthen risk management systems. As part of overall risk management improvements, firms should endeavor to better align compensation packages to reward returns on a risk-adjusted basis using more robust risk management practices, with greater emphasis on the long-term component of compensation.”

Since then, it seems methods to pay bankers are oozing from every corner.

But some are better than others.

For example the chairman of the Future Fund, David Murray, is reported to have said: “The best way to do that is to look at the rate of growth of capital versus the rate of growth in remuneration, and if the rewards are too high then the dollar difference should be added to the capital burden of the bank.”

The reason this is more powerful is that it forces the board to look at the real cost of setting aside more capital (lower profitability).

NAB chairman Michael Chaney, a former head of the Business Council of Australia, said he agreed with some parts of Mr. Rudd’s proposal, particularly any moves designed to stop executives reaping the remuneration benefits from “good short-term performance that turns into bad long-term performance”. Mr. Chaney, however, said he was opposed to linking remuneration to bank capital requirements. See HERE.

Another option, outlined in The Australian in May by University of NSW professor Ross Buckley, argues banks should award only a small part of bonuses each year, and hold the balance for five years, reducing them in the event of losses, linking remuneration to long-term performance.

Guerdon Associates also has suggestions. But with the air so thick with suggestions we volunteer to hold fire until the government decides to act on the advice that, according to an APRA source we talked with last week, APRA has already given.

© Guerdon Associates 2021
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