The great executive pay limits debate

Matt Buttell

After City minister Lord Myners warned that bankers who take "reckless risks" with investments could be stripped of future bonuses, executive pay limits could soon find themselves at the top of the FSA agenda.

The bankers' bonus row is already raging. With bonuses largely considered as one of the major players in the economic downturn, Wall Street Q3 profits already suggest a new bonus run is on the cards. Meanwhile, on this side of the Atlantic, debate between the UK's biggest political parties is bringing the argument to Britain's shores once again.

In fact, the UK debate has gotten so big that while City minister Lord Myners has called for banks to be "more secure," the British Bankers' Association has warned that such conditions could threaten the UK's future as a major financial services centre.

However, executive pay limits are likely to resurface in the news this week as the Financial Services Authority (FSA) gets more power to cover bank bonuses. Already the regulator has demanded a report from the major financial firms it oversees about their remuneration policies and is now expecting new legislative policies that will give the City regulator extra powers to tackle bankers' contracts that breach its rules.

According to reports, while proposed legislation will not give the regulator retrospective abilities, the law will be changed so that it allows the FSA to veto any contracts drawn up after 1 January 2010 that breach rules on bonuses and encourage bankers to take too many risks.

Reckless incentives

Lord Myners commented that: "We cannot accept the situation in the future where the incentives system in banks was leading them to do reckless things."

However, the FSA seems to be avoiding the scrutiny of individual contracts and executive pay limits, and instead is hoping to analyse banks' pay policies in their totality. However, while the FSA's power is set to grow, the fact that the regulator will not be able to override contracts already in place is disappointing some analysts.

Furthermore, as legislation is unlikely to demand that the top 20 highest paid bankers be identified and their pay disclosed - a notion previously hinted at by Myners - calls from lobbyists are growing.

As such, while the FSA has found it necessary to review some individual contracts in determining how policies work in practice, it is now thought to be looking for a new approach. Reports suggest that the regulator wants financial services institutions to retain more profits to build up the capital ratios, then consider dividends to shareholders before deciding how much money it has to put into a bonus pool to pay staff, thereby effectively creating executive pay limits. The hope being that this may ultimately reduce the size of bonus pools and encourage both responsible lending and more secure financial services.

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