EU guidelines seek to end bank rewards for failure

Draft guidelines set to be adopted April 29
Bankers' bonuses should reflect a company's performance over time and severance pay must not reward failure, according to non-binding draft guidelines drawn up by the European Union's executive body.

The European Commission is set to adopt the guidelines on April 29 as part of its response to the financial crisis which has sparked outrage in several EU states where bankers received large payoffs in spite of their institutions needing taxpayer money to survive.

The two-sets of guidelines, known as recommendations, are non-binding on EU states and similar initiatives in the past have largely been ignored.

"Whilst not the main cause of the financial crisis that unfolded in 2007 and 2008 there are is wide-spread consensus that inappropriate remuneration practices in the financial services industry also induced excessive risk taking and thus contributed to significant losses of major financial undertakings," the guidelines obtained by Reuters said.

There have been calls for binding rules but top Commission officials doubt if the bloc has legal powers to act in an area seen as the purview of member states.

EU Internal Market Commissioner, Charlie McCreevy, is set to propose giving supervisors new powers to require banks to set aside more capital if their pay policies encourage very risky behavior.

The guidelines apply to all financial undertakings having their registered office or head office in an EU state.

Germany has already begun taking steps to limit executive pay and France is mulling similar moves. Banks themselves are making changes in the face of public anger.

The main elements of the guidelines include:

  • pay policies should set a maximum limit on the variable component at a specified percentage of the total pay;
  • a bank should be able to withhold bonuses entirely or partly when performance criteria are not met;
  • banks should be able to scrap bonuses when the business runs into serious problems;
  • the major part of a bonus should be deferred with a minimum deferment period;
  • severance pay should be related to performance achieved over time and not reward failure;
  • bankers could be made to repay bonuses given based on performances that subsequent data has proved inaccurate.

The second set of guidelines cover remuneration of directors of listed companies, beefing up a 2004 set of guidelines that nearly all EU states ignored.

The revised guidelines say directors' pay should promote long-term sustainability of the company and avoid rewarding "golden parachutes" for failure.

A vesting period of at least three years should apply to share-based remuneration schemes for directors, the guidelines say.

After vesting, the directors should hold a number of shares, representing for example the value of two years annual remuneration, until the end of their employment.

Financial Mirror, April 24, 2009 - By Huw Jones (Reuters)

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