78% of people believe that the existing banking bonus culture is “unhealthy” and public faith in the system languishes at an all-time low. But are the FCA’s new proposals the best way to tackle the problem? Oliver Parry, Corporate Governance Adviser to the Institute of Directors, has his doubts.
The proposals which were outlined this week in a joint Financial Conduct Authority (FCA)/Prudential Regulation Authority (PRA) consultation on new remuneration rules in banking, allow bonuses to be clawed back up to 10 years after they are paid out if senior managers come under investigation at a later date. This, says Parry, seems “extreme.”
“Clawback is not a crude regulatory instrument like the EU bonus cap.” He says. “But in suggesting tough rules by international comparison, UK regulators must be very careful to balance the stability of the system against the need for vibrant banks that oil the wheels of the economy.”
This doesn’t mean, though, that nothing should be done about the issue, according to Parry. Executive pay across the UK’s biggest companies, not just in banking, can raise eyebrows – especially as pay quadrupled from 2002 to 2012 without any obvious correlation to company performance. “While exceptional levels of pay may be justified in exceptional circumstances for exceptional individuals, the median level of executive pay has ratcheted up to a level that is at times hard to justify,” says Parry. “This is unhelpful to the reputation and legitimacy of UK businesses.”
Whilst pay in the private sector is ultimately in the hands of the firms themselves, Parry hints that the government should get more involved in the shareholder-company engagement process to make it harder for greedy directors to fatten their wallets at their company’s expense. The public, too, has a role to play in defining norms and pressuring companies to keep pay appropriate, he says. But, ultimately it comes down to shareholders.
“Indeed, we have called for remuneration to be designed to promote the long-term success of the company and for performance-related elements to be stretching and rigorously applied,” he said. “To quote Bischoff, ‘Remuneration and incentives that encourage people to cut corners or prioritise short-term gains over the long-term interest of the company should be rejected.’”