The Financial Stability Board review of remuneration issues that may have facilitated the global financial crisis identified several factors whereby key risk takers received incentives that allowed them to share the upside while limited the exposure to the downside for excessive risking taking. One of these was the practice of job-hopping. A risk taker would jump ship, usually into the arms of a competitor bank at a higher pay level, before his/her sins of the past become known. Exacerbating the problem was the practice of making the banker “whole” for any forgone payments incurred by changing employers.
The practice of incentive pay deferral with the prospect of forfeiture for excessive risk taking, discovered in hindsight, is now a standard practice among all major banks around the world as a result of globally coordinated regulation. But, in view of the practice to make up for forgone deferred payments on joining a competitor, the practice may be considered less effective as a method to reduce the extent of excessive risk taking. While recognized as an issue both at global and at local levels (see, for example, APRA’s guidelines HERE), few banks have done anything about this…until now.
Deutsche Bank is recognized as a global systemically important bank. As such, it is subject to more scrutiny by regulators than most other banks. Now, it has become the first global bank to introduce rules allowing it to claw back the deferred incentives external recruits earned at previous employers that were converted into Deutsche Bank shares upon joining the bank (see the Financial Times report HERE).
The largest European lender by assets has significantly amended its deferred incentive rules, enabling it to take back unvested shares that newly hired senior staff received in exchange for shares earned at another bank.
The rules, which came into force in January, apply to all new senior hires considered to be involved in the bank’s risk-taking. These more than 1,300 “regulated employees“ include managing directors in the corporate and investment bank and members of the management committees of all other units.
There is a problem with being the first. In a fiercely competitive world, other banks may take the opportunity to “beggar thy neighbor”, and steal staff with policies that do not threaten to take away deferred nest eggs. The game of “prisoner’s dilemma” applies to Australian banks as well as those anywhere else. Nevertheless, we expect to see more of these standards being set locally, with a little help by regulators such as APRA to overcome the “prisoner’s dilemma” problem.© Guerdon Associates 2023 Back to all articles