Reinventing compensation

Executives of banks have been flayed for drawing huge pay packets without commensurate corporate performance. Robin Buchanan says the ...


Robin Buchanan says the scrutiny into compensation will go beyond the financial services industry. He recommends board directors of all businesses have answers to seven critical questions at their fingertips.

Rarely have we seen so much widespread anger as the storm that has been unleashed since the failure, among others, of Lehman Brothers and Merrill Lynch in the US and Royal Bank of Scotland (RBS) and HBOS in the UK.

Egged on by the media, the sound of creaking bandwagons is deafening as politicians leap aboard vying with each other to be the most indignant.

There is a real danger that the public loathing of banks exacerbated by the sinking economy could turn against incentives for business executives generally. “Bonus” is already becoming a dirty word.

Press criticism is starting to appear about bonuses of a few thousand pounds being paid to relatively low-level managers in financial institutions.

Yet an award of £7,000 to a bank manager for working hard and doing well is hardly comparable to the pay-offs received by Merrill Lynch’s Stan O’Neal or RBS’s Sir Fred Goodwin.

Too often, business leaders have stood by while politicians make the running on compensation and similar governance issues.

US Senator Chris Dodd of Connecticut is leading the charge in his country.

He has written clauses into the TARP (Troubled Asset Relief Program) legislation that we will all come to regret.

Limiting bonuses to one-third of annual pay will only result in increases of salary to make up for lower incentives. The result will be higher remuneration for (possibly) worse performance.

This is not the first time that we have been in such a spot.

The Clinton Administration’s attempts to regulate executive pay were a trigger for an explosion in complicated option schemes that, ironically, were one of the underlying causes of the current Wall Street crash.

Is this the politicians’ fault? No. Nature abhors a vacuum. That applies particularly to leadership.

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