Draft UK Rules on Pay Disclosure for Top Earners at Banks
By: Philip J. Morgan
The UK remains at the forefront of international efforts to regulate bank pay practices. On 10th March 2010, the UK Treasury published draft new rules that, if they remain in their current form, will require the annual public disclosure by large banks and building societies of an "executives' remuneration report." See
http://www.hm-treasury.gov.uk/fin_bill_draftregulations.htm
The new rules would, amongst other things, require the annual disclosure of the number of employees within pay bands starting at £500,000 to £1,000,000. They would only apply to a bank (including any associated company providing services to the bank) with more than 1000 employees provided that the bank (either alone or together with its corporate group members where most of the group's activities are financial services activities) also has more than £100 billion of assets on its balance sheet.
Paul Myners, Financial Services Secretary to the Treasury, said "Remuneration remains contentious. The UK cannot be accused of shirking this difficult challenge. From the outset of the crisis, the Government has been focused on eliminating rewards for failure and ensuring that remuneration does not incentivise excessive risk taking or inadequate risk management."
The draft rules implement some of Sir David Walker's proposals to give shareholders more power and information to shape remuneration policies at banks, and in some cases go further. For example, Walker proposed to require disclosure above a £1,000,000 aggregate pay floor.
The rules would require an annual executives' remuneration report to be posted on the internet, with a copy sent to each shareholder. In addition, any bank on the main market of the London Stock Exchange would need to seek shareholder approval of the report by majority vote at its annual general meeting.
The report would include, among other things, a statement of the bank's remuneration policy, a summary of bonus performance conditions and the reasons for them, an explanation of the way in which the policy takes account of risks (including information on the deferral policy and vesting of deferred benefits) and a report from the bank's remuneration committee (if any) relating to the committee's decision making process on these same matters. Perhaps most controversially, the report must disclose the number of executives earning over £500,000 aggregate remuneration per annum and the breakdown of that number into £500,000 bands up to £5,000,000 and thereafter in £1,000,000 bands. The report must also, for each band, give the aggregate amounts paid to employees in the band under the following broad headings: basic salary, expense allowances, cash bonuses, share bonuses, share options, long-term incentive schemes, pension benefits and other benefits.
The disclosure regime is intended to come into force for annual reports in respect of 2010 issued in early 2011.
Plainly, the proposed rules are important, but it remains uncertain whether they would have any real impact on the size or structure of aggregate pay awards. Part of the rationale underlying the proposed rules is the notion that shareholders, armed with more precise information, will be better able to influence bank practices. Yet in the past, the empowerment of shareholders has proven to be an imperfect means of securing change, and it remains to be seen whether these new disclosure rules will make much difference in practice. They will, however, put new information into the public domain, and at a minimum, the UK media can be expected to draw public attention to both the levels of compensation paid and, in particular, compensation levels that are out of line with those of competitors, or with the bank’s financial performance.
