Global leaders meeting at the Group of 20 summit in Pittsburgh next week are moving toward a compromise on compensation rules that fall short of the political rhetoric branding banker pay a worldwide disgrace.
Pay caps, once pushed by French President Nicolas Sarkozy, were excluded from recommendations made by finance officials this month. European leaders now may be willing to endorse linking bonuses to a bank’s capital level, moving closer to a U.S. position that avoids specific limits.
“It’s a way of getting both sides to the same place,” said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics in Washington and former International Monetary Fund economist. “The Germans and French are taking a firm stance that we need concrete steps. The U.S. wants higher capital levels, and if this is necessary to get higher capital, they can sign onto it.”
Europe’s leaders have been assailing bankers and their pay while President Barack Obama says setting a specific limit is impractical. Sarkozy, who vowed last month to block banks from state business unless pay is capped, may be open to compromise, a French official said yesterday. European Union leaders Sept. 17 agreed to tie bonuses to bank performance and said guaranteed pay should be avoided. French Finance Minister Christine Lagarde in July called such bonuses an “absolute disgrace.”
Obama, Sarkozy, U.K. Prime Minister Gordon Brown and Chinese President Hu Jintao, meeting in Pittsburgh Sept. 24-25, will discuss proposals for banks to retain more assets in economic expansions and satisfy a leverage ratio, which measures equity as a proportion of total assets. They will consider how to sustain the recovery, avoid protectionism and improve accounting rules.
‘Excessive Risk-Taking’
“There is consensus on a set of principles for compensation that discourage excessive risk-taking and tie compensation to a firm’s long-term performance,” said Daniel Price, who organized a G-20 summit in Washington in November for President George W. Bush and is now a partner at law firm Sidley Austin LLP in Washington.
The principles include paying a higher percentage of compensation in stock, requiring that bonuses are paid over time and be subject to so-called clawbacks if a company’s performance worsens, and eliminating multiyear pay guarantees, Price said.
With a concentration of financial firms in New York and London, the U.S. and U.K. “don’t want to do anything that would make firms migrate out,” Goldstein said.
Executive pay came under scrutiny after the U.S. bailed out financial institutions amid the global crisis last year. Lawmaker outrage over pay reignited in July when New York-based Goldman Sachs Group Inc. set aside a record $11.4 billion for compensation and benefits in the first half of this year.
‘Set of Rules’
“It’s hard for the U.S. to say we don’t agree with what you’re trying to do because I think politically that would look bad,” said Mark Borges, a principal at Compensia Inc., a Corte Madera, California-based compensation consultant. “The U.S. might say they’re willing to sign on to the principles the G-20 is trying to establish, but when it comes to implementing those principles we have our own set of rules.”
U.S. bank employees at 28 of the largest holding companies may face curbs on their pay under proposals being considered by the Federal Reserve. The plan is at the core of the Obama administration plan to let the Fed monitor risks to the financial system, according to people familiar with the matter.
European leaders have been outspoken on pay remedies since the onset of the financial crisis.
‘Bubble Burst’
“The bonus bubble burst tonight,” Swedish Prime Minister Fredrik Reinfeldt said Sept. 17 after the European Union agreed that the G-20 should adopt binding rules on bonuses backed by the threat of sanctions.
Linking bonuses to bank capital might be the way to curb compensation, said Sarkozy, who has softened his rhetoric as the summit approaches.
“The idea of raising capital requirements in proportion with speculative activities, which are generating these so- shocking bonuses, seems a more efficient capping method,” he said after the EU meeting.
Mario Draghi, chairman of the Financial Stability Board, a group of bank regulators asked by the G-20 for proposals before the summit, said Sept. 14 that regulators are within their rights to limit banker bonuses and salaries.
“It used to be they were told it was a private contract,” said Draghi, governor of the Bank of Italy. “It’s now quite clear that when compensation is not aligned with risk-taking incentives, regulators have the right to have their say.”
U.S. officials, including Obama, advocate policies that focus on practices rather than setting specific pay ceilings.
‘Best Check’
Shareholders are the “best check” on pay practices, and government shouldn’t dictate standards when firms avoid taking taxpayer funding, Obama told Bloomberg News on Sept. 14. “You have to start asking yourself: ‘Well, why is it that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or NFL football players?’”
The rhetoric reflects “a philosophical difference between the way Europe considers markets and how the U.S. considers markets,” said Paul Hodgson, a senior research associate on compensation at the Corporate Library in Portland, Maine.
The summit presents an opportunity to push through changes that may become increasingly difficult to make, Hodgson said. “As the economy begins to recover and banks start to make money, the strength of the position that things need to change weakens,” he said.
Kenneth Feinberg, Obama’s “special master” on executive pay, is to rule this year on pay proposals from New York-based Citigroup Inc., Bank of America Corp. in Charlotte, North Carolina, and five other companies that received U.S. aid more than once in the past year.
The House in July passed a bill letting regulators ban Wall Street incentive pay that encourages excessive risk-taking. The bill authorizes bank agencies and the Securities and Exchange Commission to bar practices that threaten the sustainability of financial companies and “could have serious adverse effects on economic conditions.” The bill may fail in the Senate, which has been reluctant to expand government’s role on compensation.
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