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Bank Executives’ Comp Played Part in Meltdown, Group Says

Lawmakers and critics have taken aim at execs at Merrill Lynch, Citigroup and others, noting the mismatch between those firms’ poor share performance and the high payouts given to outgoing CEOs.

September 16, 2011
The head of an international group of bankers said Thursday, July 17, that executive compensation at financial institutions was partly to blame for the credit crisis—and that pay packages need to be based on risk-adjusted performance and shareholder interests.

Speaking at the National Press Club, Josef Ackermann, who chairs the Institute of International Finance and the board of Deutsche Bank, said banks’ executive compensation policies should be sustainable and should include clear benchmarking that takes into account shareholder performance.

“Compensation incentives should not induce risk-taking in excess of a firm’s appetite,” he said.

An institute report on proposed bank best practices released Thursday said a sizable portion of the pay of bank executives should be made up of deferred or equity-related components. The report also suggested that boards include risk adjustments in profit and loss statements when setting executive compensation.

Some shareholder groups have argued that compensation packages led banking executives to ignore highly risky securitization practices. One example: short-term bonuses for bank employees tied to the origination of subprime loans that were packaged into complex securities.

Ackermann said bonuses at all banks should be “carefully timed” to match a firm’s risk management practices—and bonuses and commissions should avoid links to risky products.

A number of investment bank executives were hauled before Congress earlier this year to testify about their massive payouts. Lawmakers and critics have taken aim at execs at Merrill Lynch, Citigroup and other banks, noting the mismatch between those firms’ poor share performance and the high payouts provided to outgoing CEOs.

In addition to the proposed changes to executive compensation practices, the Institute of International Finance report included a number of other suggestions, including convergence of international financial reporting standards and U.S. generally accepted accounting principles, and a study of fair-value accounting standards.

In April, the institute issued a report calling for a discussion of changes to fair-value accounting disclosure, suggesting the creation of a “circuit breaker” for fair value that would “cut short damaging feedback reports” in times of market stress. The institute suggested that banks should disclose to investors when valuation input is inadequate.

After the report was circulated, however, there were news reports of a backlash from certain regulators and institute member Goldman Sachs. The institute has not commented on those reports, but Ackermann said there was no disagreement among the member firms about the report, and that “all the key people” have worked together to finalize the report.

Nevertheless, the report released Thursday offers a softer approach to fair value, noting that “if there are improvements to fair-value accounting approaches, then they will need to be on a symmetrical basis and balanced between the upside and the downside,” said Cees Mass, institute co-chairman and former CFO of ING Group.

Filed by Nicholas Rummell of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.