In the mire: Bankers' pay controls get bogged down

G20 ministers agree tough action is needed but with countries veering in all directions, will there ever be a solution?

Attempts to control bankers' pay have become enmeshed in global politics. The finance ministers of G20 countries met in London yesterday to try to agree a common code for curbing bank bonuses, but each major nation has its own agenda and the subject will now be aired again when prime ministers of the countries meet in Pittsburgh on 24 and 25 September.

The meeting of EU finance ministers agreed that tough action was necessary, but could not agree what. Swedish minister Anders Borg called for "stronger muscles and sharper teeth" but countries are currently wrestling and biting each other.

Since the G20 meeting in April that set the guiding principles for pay, each country has been producing detailed policies – and these differ significantly. US legislation faces a tough mauling by a sceptical Senate while British regulators and politicians disagree over policies. The French President, Nicolas Sarkozy, is advancing the toughest proposals, but only the German Chancellor, Angela Merkel, is backing them – knowing she has a general election just two days after the Pennsylvania summit. Mr Sarkozy said: "We want to see things changed in Pittsburgh."

He and Mrs Merkel met in Berlin last week and are proposing that EU ministers meet on 17 September to co-ordinate European plans. "This excess cannot be allowed to continue as though nothing ever happened," she said, but America's pay czar, Kenneth Feinberg, and Britain's Sir David Walker will not finish their reports on bankers' pay until after the US summit. Nor has the Basel committee of central bankers yet produced detailed constraints that would apply to all international banks. Among other countries, Belgium and the Netherlands are close to agreeing pay codes, but Switzerland has rejected calls to control remuneration at UBS, despite the government share stake.

April's G20 meeting called for bonuses to reflect risk and be based on long-term performance. It demanded that shareholders monitor remuneration policies, directors play a greater role in setting pay, and greater transparency. Using capital requirements to penalise banks for high payments was suggested too.

The European Union based its own financial reforms on the G20 conclusions, ambiguously adding that: "Ethical behaviour should be promoted and unethical behaviour sanctioned". By "sanctioned" it is meant penalised, not approved.

United measures are essential to stop some financial centres operating soft regulation and attracting banks and bankers from other countries. Gordon Brown, the Prime Minister, said the world must be more co-ordinated, calling common action "a form of global economic governance". Lord Turner, the chairman of the financial Services Authority, insisted that his mooted Tobin tax on financial dealings would have to apply worldwide – though it has won little favour in Britain.

There is pressure to reach agreement before the financial crisis ends and memories fade, but even if G20 leaders agree a global code, different countries will apply it with differing rigour and international disputes are likely to ensue.

Here we look at the differing thoughts of some of the leading players and how they see global regulation working:

UNITED STATES

When George Bush announced the initial bank bail-outs he proposed curbs on the top five executives at Wall Street firms receiving funds, but his successor in the White House has extended that to the top 25, with a review of the next 75 highest-paid.

Barack Obama has appointed Kenneth Feinberg (above) – the lawyer and mediator who negotiated settlements for the 9/11 victims – as his "pay czar" to review remuneration at the seven biggest institutions sharing in the $787bn "Tarp" bail-out. That includes carmakers General Motors and Chrysler, besides banks such as Citicorp and the state-owned insurance group AIG.

Mr Feinberg has been given 60 days to review the groups' proposed pay and will report by early October. It is the first time a US government official has had powers to veto private-sector pay, and he is expected to say that bonuses should be spread over several years and be paid largely in stock rather than cash. But while he will dictate the pay of Wall Street chiefs such as Ken Lewis of Bank of America, other bankers have already circumvented controls. Wells Fargo, which, despite receiving $25bn of Tarp funds, is not one of the seven being reviewed by Mr Feinberg, has increased the pay of its chief executive, John Stumpf, sixfold, converting bonuses into basic pay.

The outrage over the $65bn in bonuses paid by AIG and news that the Tarp banks' bonus payments totalled $32bn with nearly 5,000 bankers receiving over $1m each, has quietened but legislation is working its way through Washington. The House of Representatives has passed a Bill capping pay incentives if they could encourage risky practices, and creating independent remuneration committees. Shareholders of all companies, not only banks, will vote on directors' pay, but, like UK votes on remuneration reports, these "say on pay" polls will be non-binding. Banks oppose the controls, saying it will be harder to recruit and hold staff, and the Bill faces a tough hearing by the Senate next month.

Wall Street's regulator, the Securities & Exchange Commission, added to the pressure on pay last week when its chairman, Mary Shapiro, wrote to warn firms not to give rewards that encourage them to deal excessively or risk clients' money.

Mr Obama is also proposing higher income taxes on earnings over $1m. Though aimed at financing his healthcare reforms, that would hit high-paid bankers and raise the marginal tax rate above 55 per cent in seven states, including New York, New Jersey and other parts of New England.

FRANCE

Mr Sarkozy broke the Parisian August holiday to call bankers to his office in the Elysée Palace and agree a new code on bonuses. His threat was that banks that breach the rules will be blacklisted from working for the government. The code means not only that rewards must be performance-linked, but that up to two-thirds of any bonus must be deferred for three years, and even in the next two years the payment could be clawed back if profits of the bank or the trading team do not reflect the risk taken. And a third of the bonus must be taken as shares rather than cash.

BNP, the major bank that has received €5bn of state aid, immediately halved the €1bn set aside for this year's bonuses.

Mr Sarkozy, together with his Finance Minister, Christine Lagarde (below), wants a cap on bonus pools, limiting them to a fixed proportion of bank revenues. And he had already agreed a one-year restriction on guaranteed payments. Now banks will have to publish their bonus policies and pay decisions will be taken away from the heads of trading desks and given to remuneration committees.

France has also followed the US in appointing a pay czar. Michel Camdessus, the past governor of the Bank of France and former head of the International Monetary Fund, will head a new commission to study pay structures at banks in receipt of state aid.

GERMANY

Mrs Merkel is backing the French proposals but is seeking to be even tougher on some issues. She wants bonuses deferred for at least four years, rather than three, for instance.

BaFin, the country's markets regulator, is imposing a code from January that will bar bonuses being based on short-term profits and prohibit rewards that encourage undue risks. Mrs Merkel also wants to impose a cap on pay at banks that have received state aid, and her Finance Minister, Peer Steinbrueck (above), wrote to fellow G20 countries outlining plans to defer options awards and demanding publication of all payments to top executives.

They are also proposing wider controls on banks, however, including new rules on liquidity and insolvency. They think the whole financial services industry should be made to pay for the government action bailing-out the sector and are arguing for a limit on the size of institutions. "No bank should become so big that it could get into a position where it could blackmail governments," Mrs Merkel said.

UNITED KINGDOM

The code on bankers' pay published by the Financial Services Authority will apply from next year, but UK policy is still evolving, with regulators demanding government action. Sir David Walker is yet to produce his final report on bank governance for ministers, and the FSA's chairman has speculated on a transaction tax to limit banks' profits.

The FSA has been criticised for diluting its initial proposals too, reducing the number of banks covered from 45 to 26, delaying implementation from November to January, and turning hard rules into guidance. And some big, foreign-owned banks operating in the City will be excluded from controls, because their London offices are branches regulated from their home countries.

There will be a bar on bonuses guaranteed for more than one year, but making payments when banks make losses, linking bonuses to the profitability of the whole bank and deferring two-thirds of payments for three years are now only guidance. The regulator also wants bonuses linked not only to long-term future risks but to non-financial criteria too. And it wants risk managers and compliance departments to be involved in setting bankers' pay.

The banks have been given until October to say how they will implement the code. The penalties for breaching it could be fines but might require the bank to hold additional capital to compensate for the risk.

Before producing its code, the FSA argued that it was the job of politicians, not regulators, to curb individual pay deals but after initially proposing legislation, ministers have stepped back from specific controls. However, since producing the code, Lord Turner (below) has floated the idea of a global Tobin tax (named afetr economist James Tobin) on transactions to reduce banks' ability to pay bonuses – a decision for government. And while his original report conceded that tough City controls could damage London's position in world finance, Lord Turner has now suggested that banking is too large a part of the UK economy.

As the main shareholder in a large part of the banking sector, the Government could control pay, but despite prolonging the payment period, the new chief executive of state-owned Royal Bank of Scotland, Stephen Hester, is being paid a potential £9.7m.