Report highlights flawed banking remuneration practices

The financial crisis has exposed serious flaws in remuneration practices in the banking sector, and City minister Lord Myners displayed “inadequate oversight” over the pension of ex-RBS boss Fred Goodwin, a report by MPs has found.

The Treasury Committee’s third report on the banking crisis, released today, found bonus and reward schemes in investment banking in particular had serious shortcomings and contributed significantly to the banking crisis. It warned that regulator FSA had “downplayed” the role remuneration played in causing the crisis, and questioned whether the regulator was acting sufficiently to tackle the issue.

It also said Lord Myners could have dismissed Goodwin rather than allowing him to resign, meaning he would not have been eligible for the £763,00-a-year pension he now receives.

Committee chairman John McFall said: “Bonus-driven remuneration structures [in the City] led to a lethal combination of reckless and excessive risk-taking. The design of bonus schemes was not aligned with the interests of shareholders and the long-term sustainability of the banks, and has proved to be fundamentally flawed.”

The report added: “The committee is further not convinced that Lord Myners was right to take on trust RBS’s suggestion that there was no option but to treat Sir Fred as leaving at the employer’s request. It would, in the committee’s view, have been open to Lord Myners to insist that Sir Fred should have been dismissed.”

The Banking Crisis: reforming corporate governance and pay in the City report also pinpointed three problems with the appointment of non-executive directors in banks, including: the lack of time many non-executives commit to their role, with many combining a senior full-time position with multiple non-executive directorships; a lack of expertise in many instances; and a lack of diversity.

However, bonuses should not be prohibited at part-nationalised banks, McFall said. “They could struggle to retain and recruit the staff they need, to the detriment of the taxpayer as a major shareholder in both institutions,” he said.

Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development, warned the report had missed a trick by focusing too heavily on reward for failings in the banking system.

He said: “This report has thrown down the gauntlet to all financial sector organisations. Times have changed and it would be wrong to assume they can sit on their hands and wait for the ‘good times’ to return. They must look at the performance, values, attitudes and behaviour the organisation needs from its top talent, and how it will reward and recognise this.”

He added: “It is dangerous to overplay the role of bonuses in contributing to the banking crisis and the impact that their reform will have.”

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