France to seek G-20 ban on guaranteed bonuses for bankers
Aug 17th 2009 2:00PM
Updated Dec 4th 2009 1:00PM
Calling the practice an "absolute disgrace," Finance Minister Christine Lagarde said France will urge the Group of 20 to ban guaranteed bonuses for bankers.
"I think it is an absolute disgrace that guaranteed bonuses of several years could still be paid, or that some people are thinking of reinstating the old ways of compensating with insufficient relationship between compensation and lasting performance and risk management," Lagarde said in an interview last month with The Financial Times.
Major industrial nations such as the United States, United Kingdom, and France are reviewing the best ways to implement their promise to each other to both restructure and limit banker compensation.
U.K. Chancellor of the Exchequer Alistair Darling signaled Saturday that he may change U.K. law to curb bonuses after the nation's financial regulator watered-down rules proposed in February, Bloomberg News reported Monday. Eight of ten British citizens opposed the watered-down rules. Further, the U.S. Treasury has started to review compensation for top executives at seven companies that received bailout funds from the U.S. government: the government's 'Compensation Cop' Ken Feinberg has 60 days to review the pay plans.
Meanwhile, France's Lagarde, expected to meet with French bankers next week ahead of a meeting with her G-20 colleagues in September, underscored the importance of outlawing, on an international basis, guaranteed bonuses.
"What matters is that banks stop paying guaranteed bonuses; that's not acceptable," Lagarde told Bloomberg News. "Bonuses must be linked specifically to results. They must not encourage the taking of risks that are dangerous for the bank and for society."
Banning guaranteed bonuses: downside exists
One would not think that a ban on guaranteed bonus -- essentially extra pay whether or not a bank performs well -- would contain drawbacks, but in practice it does.
First, critics say unless the guaranteed bonus ban is universal, banks in the regulated nation states will be at a competitive disadvantage to banks that have retained guaranteed bonuses. The result, they say, will be a flight of talented bankers to the bonus banks.
Second, critics also point out that banks and other financial institutions in the regulated nations states may try to circumvent the rules -- creating pay and compensation plans that technically are not "guaranteed," but that have performance requirements that are so low that they are de facto guarantees or tantamount to being guaranteed.
Economic Analysis: At this juncture, it's hard to say whether the G-20 will have the unity to pass a universal guaranteed bonus ban with teeth. France is the most assertive, the U.K. appears willing to pass some type of restriction on guarantees, but Germany remains an open question.
And the United States? A lot will depend on the stance of the Republican members of Congress. (Democrats will probably support a guaranteed bonus ban.) The Republicans' historically hands-off free market ideology that opposes regulation of compensation has taken a back seat now that U.S. taxpayer dollars are subsidizing bankers' executive compensation, but it's uncertain as to whether they'll vote to ban or limit guaranteed bonuses.
From an investor standpoint, one would like to think that after the worst financial crisis in 80 years, we'll arrive at a capitalist compensation system that supports, you know . . . capitalism. Namely -- if your company earns a profit, you get a bonus; if you're company fails, you don't. But we're not there yet, at least the United States isn't: apparently, public anger hasn't been loud enough or it's been misdirected.