Josef Ackermann, chief executive officer of Deutsche Bank, the largest bank in Germany, and Peter Kurer, chairman of UBS, the Swiss banking giant, have agreed to waive their 2008 bonuses in the face of calls from regulators and governments across the globe for financial institutions to curb executive remuneration.Kurer’s admission came in the wake of the Swiss National Bank funding a $60 billion special purpose vehicle to clear illiquid assets from UBS’ balance sheet.
Other UBS employees will still be eligible for their 2008 bonuses. The bank is, however, in the process of revising incentive systems, looking to reward divisional management and staff for stimulating shareholder value in their own unit.
Ackermann made the announcement despite having already said that Deutsche Bank would not need to tap the €100 billion loan facility provided by the German government. Participants in this scheme will have to accept restrictions on remuneration, including a €500,000 salary cap for bankers.
The whole of Deutsche’s group executive committee and management board will not receive a bonus this year. When asked whether waivers on bonuses would extend beyond senior bankers to the trading floor, an official from the bank declined to comment.
France’s plan, in which the government will loan €10.5 billion to six of France’s most prominent banks, includes similar preconditions on executive-level remuneration, as does the Swedish government’s proposal of guaranteeing up to $202 billion of bank loans.
UK prime minister Gordon Brown set the precedent for demanding greater oversight on remuneration schemes for banks participating in government bailouts, when he announced the UK’s own plans on October 8.
The Financial Services Authority (FSA) followed this with a set of guidelines, applicable to all banks. These focused on how bonuses should be structured, as well as outlining the need for greater governance on executive compensation.
The FSA recommended that a significant proportion of bonuses should be paid on a deferred basis in order to reflect an individual’s long-term performance. Another proposal was for bankers to receive part of their bonus in equity, with the intention of aligning the individual’s interests with those of the bank.
Before the financial crisis, banks were reticent to act unilaterally when implementing such measures, fearing it might trigger a migration of talent from their own institution. Governments are now using the economic climate as a pretext to crack down on regulation, although it is unclear how effective the measures will be.
Officials from all three banks participating in the UK bailout package, Royal Bank of Scotland (RBS), HBOS, and Lloyds TSB, declined to comment on restructuring bonus systems throughout their firms, but confirmed executive-level bonuses had been reviewed.
RBS board members are set to receive no bonus for 2008, while their 2009 bonus is likely to be in company stock. At HBOS, board members will not receive cash bonuses in 2008, while Lloyds TSB’s executive board will be remunerated in shares this year.
Meanwhile, banks not participating in the bailout have yet to react to the FSA’s recommendations. An official at HSBC said he was not aware of any change regarding either remuneration for executives or plans to restructure bonus schemes throughout the bank.
Barclays has made no official announcements regarding bonuses, although an official said that remuneration levels are likely to be dictated by what is thought “appropriate”, given the current economic climate.
The US Treasury has echoed concerns about executive remuneration. On October 14, Treasury secretary Henry Paulson said institutions participating in the Troubled Assets Relief Program (Tarp) and the $125 billion Capital Purchase Program (CPP) “will accept restrictions on executive compensation”.
Beyond the banking sector, insurance giant AIG has come in for fierce scrutiny, with New York attorney general Andrew Cuomo saying that intervention in its remuneration policy was justified by the 79.9% equity stake the government now holds in the company. Cuomo derided AIG’s “unwarranted and outrageous expenditures”, promising protection for taxpayer money.
Severance payments, worth $19 million, to former CEO Martin Sullivan have been frozen. The division seen to be at the heart of AIG’s problems, the financial products unit, will not see any of a $600 million compensation and bonuses pool that was due to be distributed.
However, the modest slices that the US government holds in US banks pale in comparison with the $120 billion in capital and loans used to rescue AIG. Accordingly, CEOs at US banks have been non-specific on their own plans to revise remuneration.
“We need to cut back compensation in this industry,” said Ken Lewis, CEO at Bank of America, in an interview with CBS. “A lot of people made a lot of money who did not deserve it,” conceded JP Morgan Chase’s CEO Jamie Dimon at a conference at Harvard University.
Officials contacted from the nine US banks participating in the CPP declined to comment either on bonus schemes for 2008, or on potential reviews of remuneration structures throughout their firms.
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