Germany and Sweden joined a growing list of nations putting limits on financiers’ compensation as part of attempts to rescue their banking system. At least six countries have curbed pay or are set to do so.
Wall Street executives like Peter Kraus, a top executive at Merrill Lynch, who last month accepted a takeover offer from Bank of America, is likely to leave with more than $10 million in compensation, The Wall Street Journal reported. A Merrill spokesperson said that the government did not include Kraus’ job as it wasn’t among the company’s top-five jobs.
Countries are moving to curb executive pay at companies with or without government rescues.
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AUSTRALIA: Prime minister seeking executive-pay rules for finance firms to discourage excessive risk-taking; he will then propose the rules to the international community.
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FRANCE: Business leaders adopted code of conduct that prevents ‘golden parachute’ exit payments for failed executives.
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GERMANY: Compensation for top executives at banks tapping government bailout funds capped at €500,000; bonuses, stock options and severance barred.
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NETHERLANDS: Top executives of ING Groep NV agreed to give up 2008 bonuses and limit severance if dismissed in exchange for government financial injection.
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SWEDEN: Participating banks in proposed bailout must agree with government to limit compensation for ‘key executives.’
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SWITZERLAND: UBS AG agreed as part of recapitalization to use international best practices for executive pay and government monitoring. U.S.: Limits on corporate-tax deductions on executive pay and ‘golden parachutes.’ Firms also must recover awards based on inaccurate results and bar incentives for ‘unnecessary and excessive risks.’
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U.K.: Government is taking board seats at two big banks, permitting more oversight of pay practices; regulator wants investment banks to drop pay practices that may have encouraged risk-taking.
Source: WSJ reporting
Stephen Davis, a senior fellow at Yale University School of Management’s Millstein Center for Corporate Governance and Performance and editor of Global Proxy Watch, told the WSJ that governments need to impose pay limits “to get popular buy-in for these bailouts.”
Of the most restrictive programs, Germany is near the top. In addition to salary limits for top executives, it also prohibits bonuses, stock-option grants, severance payments, and option exercises at banks drawing government funds during the bailout program which will last through 2012.
The U.S. is less severe and holds a middle ground. For the five top executives at participating companies, the Treasury Department is limiting corporate-tax deductions on executive pay and golden parachute payments for departing executives. Some companies will be required to recover awards to executives that were made based on inaccurate results. Incentives that promote executives to take “unnecessary and excessive risks” will also be removed.
Despite these changes, critics are unsure whether this will successfully curb executive compensation. Anne Simpson, executive director of the International Corporate Governance Network, a London network representing more than 500 institutional investors in 40 countries, believes that government pay curbs “might throw some sand in the cogs.” She believes that the problem that will not be fixed is the lack of accountability of corporate boards.
“Why would anyone who is an A player want to come into an institution with all kinds of [pay] restrictions?” asked Thomas Neff, chairman of U.S. operations at Spencer Stuart, an executive-search firm in New York, toWSJ.
The increasing restrictions on executive pay could result in the number of finance professionals seeking work in developing countries without banking bailouts.