Banks must disclose how much they pay top employees, a UK government sponsored report recommended on Thursday in a bid to quell public anger over "bonuses as usual" in a sector shored up by taxpayer bailouts.
The report published on Thursday from David Walker, former chairman of Morgan Stanley bank's international unit, lays down 39 steps to improve how banks are run.
Touted as the toughest set of pay rules in the world — though stopping short of actual caps — they aim to stop banks and staff betting the shop through too risky activities.
Board members should spend more time on the job and pay be closely monitored. Shareholders also have a duty to scrutinise how their companies are run, the report says.
Britain had to shore up its financial sector hit by the credit crunch. It nationalised or took major stakes in several banks such as Northern Rock, Lloyds <LLOY.L> and RBS <RBS.L>.
Walker published his recommendations in draft form in July but has toughened up sections on pay as policymakers warn banks there can be no return to "business as usual" of unjustifiably large bonuses. [ID:nLG47052]
He also wants the recommendations to be implemented in law, rather than on a "comply or explain" basis outlined in July.
"There will still be public anger over bank pay and bonuses and that's understandable," Walker told Reuters on Wednesday.
"But this disclosure is not designed to appease the great British public. It is designed to deal with the problem that these high end people are capable of influencing the risk profile of banks and it is unsatisfactory that shareholders and remuneration committees have so far focused almost exclusively on executive board remuneration."
The government said it will introduce all of Walker's recommendations as soon as possible. Last week it published a draft financial services bill with provisions to implement the review.
"Sir David's proposals are the blueprint for how banks must be run in the future," Britain's Finance Minister, Alistair Darling, said.
"We will issue draft regulations for consultation in the new year and bring them into force as soon as practicable after enactment of the bill. This will force disclosure for the 2010 performance year," Darling said.
There could be changes, however, as the opposition Conservative Party is tipped in the polls to win the election due by June when the draft law may not have been adopted yet.
Walker said he has "no reason to believe" the Conservative Party will take a different view.
"Whether this government continues or a new government takes charge, they are going to have to face this question next year and I am not for trimming my sails," he said.
TOUGHEST IN THE WORLD
Big listed banks and even unlisted firms such as building societies should report from 2010 all employees and board members whose annual packages top a million pounds.
Disclosure would be in bands, starting at one million to 2.5 million pounds ($4.14 million), with a second band at 2.5 to 5 million pounds, with bands in 5 million pound lots thereafter.
In July, Walker had recommended disclosure of pay higher than the median of executive board members — which would typically be around two million pounds.
Remuneration for each of the unnamed employees should be broken down along business lines, salary, cash bonus, deferred shares, performance-related long-term awards and pension contributions. UK-based subsidiaries of foreign banks should also make similar disclosures.
The report also recommends that all big banks operating in Britain abide by rules on pay structures that are tougher than those agreed by the G20 group of top countries in September and which major banks in Britain have already signed up to.
"These recommendations on pay are tougher than anywhere else in the world. But I am not imposing these recommendations on UK banks at this moment of time — they have to implement these recommendations by 2010," Walker said.
At least half of an employee's variable pay would be in the form of long-term incentives such as shares that vest over several years.
No more than a third of a bonus can be paid in the first year and pay can be clawed back if it was unmerited but some fear being too tough will put UK banks at a disadvantage.
"The recommendations around deferral and long performance periods go in the right direction but we remain concerned about over prescriptions and the danger that the UK may move too far ahead of international practice," the Association of British Insurers said.
Other recommendations seek to ensure that the chair and non-executive directors of banks spend more time on the job and are suitably qualified to understand the risks in some of the complex products being sold.
Walker is also recommending that institutional investors play a more active role as owners of businesses by adopting the Institutional Shareholders' Committee's (ISC) stewardship principles on a "comply or explain" basis. [nLG222766]
"Institutional investors should be less passive and prepared to engage earlier if they suspect weaknesses in governance," Walker said.
The Financial Services Authority (FSA) will also require fund managers to clearly disclose their commitment to the stewardship rules.
