Published September 24, 2009

G-20 summit takes sharp aim at bankers' pay

Disagreements loom but compensation landscape could change dramatically

By JOYCE HOOI

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(SINGAPORE) The end might be near for the days of wild frontier risk-taking by bankers, with G-20 finance ministers locking the subject of executive compensation firmly in their crosshairs for the G-20 Summit in Pittsburgh today and tomorrow.

Instead of limiting individuals' bonuses as suggested by France's President Nicolas Sarkozy, the FSB plans to limit the pool of available cash from which bonuses are paid.

Earlier this month, finance ministers of the G-20 countries had met in London, united over the need to base compensation on long-term performance, but divided over the issue of bonus caps.

France and Germany had championed mandatory caps on bonuses, while the United States and Britain had opposed them.

While France's push for a cap on bankers' bonuses might have been overturned, the other measures up for discussion are no less ominous for bankers accustomed to stratospheric icing on the cake.

Among the proposals to be tabled are regulatory measures to require banks to disclose the pay and bonuses of their highest-paid employees. Also, a bonus claw-back clause for deals that fall through within three years is in the offing.

Adding to the atmosphere of reckoning for bankers, the Financial Stability Board (FSB) - G-20's regulation coordination arm - will be issuing detailed guidelines at the summit on how financial firms' compensation packages should be structured.

Instead of limiting individuals' bonuses as suggested by France's President Nicolas Sarkozy, the FSB plans to limit the pool of available cash from which bonuses are paid.

'It's important that firms conserve profits so they can rebuild capital and support lending,' FSB chairman Mario Draghi said last week, according to Reuters.

Already, proposals have been made at the United States Federal Reserve to compare large firms' practices against their rivals' and review smaller banks' compensation schemes as part of their regular bank exams to curb excessive short-term risk-taking.

Even in the face of mounting public outrage over bonus fiascos like the US$3.6 billion in bonuses that Merrill Lynch paid to employees before its acquisition by Bank of America, experts have been divided over the specifics of the remedy for the situation in the run-up to the Pittsburgh summit.

Fanning the furore, in an interview with Bloomberg last week, US President Barack Obama had said, 'Why is it that we're going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or NFL football players?'

This was followed swiftly by a retaliatory New York Times op-ed column by economist Paul Krugman on Sunday. 'Quarterbacks who make too many risky passes don't have to be rescued with hundred-billion-dollar bailouts. Banking is a special case - and the president is surely smart enough to know that,' Mr Krugman wrote.

After the April G-20 Summit in London committed to raising resources for the International Monetary Fund (IMF) and the facilitation of world trade, the Pittsburgh one will review the progress made since then.

The discussion in Pittsburgh will revolve around the issues of reforming international financial institutions like the IMF and World Bank, the sustainable growth of international trade and what to do about the economic stimulus packages.

Already, the potential for disagreement is clear. Despite an agreement on a US$1.1 trillion global rescue package being reached in April, there has been a US$75 billion shortfall due from the European Union, as of the start of September.

While Britain has agreed to lend up to US$15 billion to poorer countries, Germany has asked that the bailout be scaled back, fearing that economies could be burdened with too much debt.

With the G-20 Summit in Pittsburgh involving more than the 20 original nations - Spain, The Netherlands, Sweden, Singapore and Thailand have also been invited - achieving a consensus on such contentious issues will be no easier than in April.