Banks should be allowed to claw back staff bonuses when performance claims prove to be bogus, the European Commission said on Wednesday, pledging legislation on pay oversight.
Bankers' bonuses should not encourage risky behaviour and severance packages must not reward failure, the executive Commission said in non-binding guidelines for European Union states.
Bank executives have drawn public anger for winning big bonuses or huge payoffs despite their institution needing government money to stay afloat.
Fury erupted in Britain over news that Royal Bank of Scotland, which needed a government rescue, is paying an annual pension of 703,000 pounds ($1 million) to its former chief executive Fred Goodwin.
"Up to now, there have been far too many perverse incentives in place in the financial services industry. It is neither sensible nor sane that pay incentives encourage excessive risk taking for short-term gain," EU Internal Market Commissioner Charlie McCreevy said in a statement.
Leaders of the G20 group of industrial and emerging economies agreed this month to rein in overly generous pay at financial institutions that may have contributed to excessive risk taking.
Lawyers expressed doubts about some aspects.
"If you are going to introduce a scheme which is based on taking money back from people … the question is how you prove and how you measure that the performance is bad," saidRichard Linskell, an employment lawyer at Campbell Hooper Solicitors in London.
"I am not sure it's particularly fair to take money back from someone when you've given it to them because they might spend it," Linskell said.
INTERVENTION
Banks and governments have already been taking action.
"I don't think we will have a problem in the UK. We are further along and a number of our banks have made some changes anyway," Angela Knight, chief executive of the British Bankers Association, said this week.
Similar initiatives in the past have largely been ignored.
The first set of guidelines on bankers' pay is new. The second set updates guidelines on directors' remuneration that were issued in 2004 and ignored by nearly all EU states.
To give the guidelines teeth, McCreevy said he would propose a draft law giving supervisors powers to intervene in bank remuneration policies deemed to pose risks to the market.
The proposal, to be made in June, will need the backing of EU states and the European Parliament to take effect.
If adopted, it would give supervisors powers to insist a bank set aside more capital if it is believed that remuneration policies encourage very risky behaviour.
The guidelines apply to all financial undertakings having their registered office or head office in an EU state.
The main elements of the bankers' guidelines include:
— payment of the major part of the bonus should be deferred to take into account risks linked to the underlying performance through the business cycle;
— performance measurement criteria should privilege longer-term performance of a company;
— financial institutions should be able to claim back already paid bonuses where data has been proven to be manifestly misstated;
— a company's board should have responsibility for oversight of remuneration policy throughout the bank;
— board members and other staff involved in the design and operation of remuneration policies should be independent;
— remuneration policy should be adequately disclosed to stakeholders;
— supervisors should ensure that financial institutions apply the principles on sound remuneration.
GOLDEN PARACHUTES
The second set of guidelines covers remuneration of directors of listed companies, beefing up the 2004 guidelines.
The revised guidelines on directors' pay say policies should promote long-term sustainability of the company and avoid rewarding "golden parachutes" for failure.
Severance pay in cases of failure should be banned and there should be a minimum vesting period of at least three years on stock options and shares with some retained until employment ends.
Companies should also be allowed to reclaim the variable component of a director's pay, and non-executive directors should not receive share options as part of their remuneration to avoid conflicts of interest.
