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London's financial district. (PAUL HACKETT/PAUL HACKETT/REUTERS)
London's financial district. (PAUL HACKETT/PAUL HACKETT/REUTERS)

Global Exchange

Europe's banks lead in withholding bonuses Add to ...

Patrick Jenkins is banking editor for the Financial Times

Nearly three-quarters of banks and insurers in Europe have introduced a system to withhold bonuses from staff if their performance does not match up to expectations.

The findings, revealed in a poll of the top banks on Wall Street, the City of London and across Asia, highlight a sharp contrast with the U.S., where only one in five uses a so-called "malus" structure to keep bonuses in escrow -- and liable to being cut -- until the longer-term impact of a year's performance can be judged. In Asia, the figure is zero.

The research, conducted by pay specialists Mercer, is timely. U.S. regulators are currently weighing the merits of adopting a similar regime to Europe, along the lines of recommendations made by the Group of 20 last year.

Regulators generally believe pay -- in particular excessively generous short-term bonuses -- was a contributory factor to the financial crisis because it motivated risk-taking for immediate gain, with little thought to the long term. The invention of malus arrangements, adopted enthusiastically by the likes of Credit Suisse in Europe and Morgan Stanley in the U.S., are an attempt to rectify such motivation.

Of the 63 groups polled by Mercer, 93 per cent in both the U.S. and Europe, and 88 per cent in Asia, said they had already changed or planned to change their pay policies, following the financial crisis and the regulatory changes that have ensued.

In all, 89 per cent of banks surveyed have mandatory deferred pay policies in place. However, strict new limits on the payment of cash bonuses to top executives in Europe are unlikely to be replicated in the U.S., where the use of share-based pay is a rarity.

Barely a third of banks and insurers in the U.S. use shares as deferred pay currency, compared with about 80 per cent in Europe and Asia, according to the Mercer poll.

Vesting periods stretch out to four and five years for 15-20 per cent of companies polled in Europe and Asia, whereas in the U.S. a standard three-year vesting period applies to everyone.

Most changes to pay policies related to an increased use of the mandatory deferral of bonuses, alterations to long-term incentive plans and a shift in the balance of pay between basic salary, annual bonuses and LTIPs.

A key shift -- cutting annual bonuses in favour of higher salaries -- was most evident in Europe. Nearly 40 per cent of banks and insurers put greater emphasis on basic pay, while 45 per cent cut the weighting of annual bonuses.

But there was also a substantially higher use of deferral, with nearly two-thirds of banks increasing the weight of the device in overall pay.

Of the banks that admitted to paying guaranteed bonuses, 15 per cent said they sometimes extended over several years, while the rest said the practice was limited to single-year guarantees. Multi-year guarantees are banned in some countries, such as the U.K.

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