November 20, 2012
Hermes Calls for Banking Pay Overhaul
– Subodh Mishra, ISS Governance Exchange
London-based pension fund adviser Hermes Equity Ownership Services this week released a five-point plan aimed at tackling “the underlying disease which besets the [banking] industry,” including bankers’ pay. Hermes EOS, whose stewardship service advises funds with more than $120 billion in assets, disclosed its calls for reform in a paper entitled, “Epidemiology: Next Steps in Banking Regulation,” calling for an end to three components of the banking industry’s “disease;”namely, the failure to “focus fully” on the needs of the client and to build long-term relationships with them; a focus instead on transactions; and a persistent desire to “ignore or game regulation.”
Proposals to reform pay call on banks to lengthen performance periods, not simply deferral of awards, which would effectively end the practice of annual bonuses, and to lower overall levels of pay so that remuneration accounts for “much less” than 50 percent of revenues. According to the paper’s authors, staff pay at most banks now stands at around 50 percent of revenues, which may “have been appropriate when banks were partnerships and the staff pay reflected a return on capital invested by the partners.” Hermes EOS suggests a ceiling of 25 percent of revenues, though argues the “most efficient banks” would cap it at far less. “It is clear that fundamental change is still needed, and if the industry does not voluntarily take on board such changes then calls for the politicians and regulators to take decisions on their behalf will only build further,” said Paul Lee, Hermes EOS’ director of policy.
The paper also calls for improved disclosure, suggesting the Enhanced Disclosure Task Force, a private group established by Basel’s Financial Stability Board, would provide ideal guidance. “Investors need the sorts of rich disclosures which the EDTF is seeking in order to understand bank performance and to call management to account effectively, disciplining the industry and its management,” the report’s authors said.