November 11, 2012 5:03 pm

Hermes to urge banks to end annual bonuses

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One of Europe’s most influential corporate governance activists will on Monday call on banks to scrap annual bonuses and drastically reduce pay in sweeping reform proposals that will add more pressure on boards to overhaul remuneration practices.

Hermes Equity Ownership Services, which advises pension funds, will urge banks to base future bonuses on three-to-five year performance instead of the annual period that is commonly used as economic yardstick for variable pay.

It will also demand banks should spend no more than a quarter of their revenues on staff pay instead of the 40 to 50 per cent that is widespread.

The proposals will be sent to bank directors this week in a move that highlights the way that shareholders, alongside regulators and politicians, are continuing to set bank boards’ agenda on pay.

They come from an adviser with links to more than $120bn in investors’ assets and is known for having forced through changes at large European companies from Siemens to Infineon.

This year pay had prompted investors to rebel at several banks’ annual meetings – from Barclays to Citigroup and Credit Suisse – as they protested that banks spent too much on bonuses at the expense of shareholders.

“The money that governments intend the banks to use to rebuild their balance sheets has been in large part siphoned off into individuals’ pockets,” Paul Lee, Hermes’ director of policy and product development, wrote in the position paper that accuses banks of “consistently gaming regulation”.

“The simple fact is that compensation ratios are simply unacceptably high,” he added.

The majority of banks in Europe and the US spend much more than a third of their revenues on pay, as staff costs typically make up the bulk of expenses in the service sector.

Last year UBS earmarked 56 per cent of its SFr27.8bn ($29.3bn) in revenues for salaries, bonuses and other staff costs, according to its annual report.

The Swiss bank is one in several banks including Barclays, Lloyds and Deutsche Bank that are examining wide-ranging overhauls of their pay structures that might incorporate some of Hermes’ proposals.

“We have been talking to pretty much every large bank in the world about this,” Mr Lee told the Financial Times.

In Europe, banks are forced by law to defer at least half of their variable pay, award no more than a quarter in cash and have clauses to withhold payments in case of wrongdoing or large losses caused by an individual employee.

But Hermes’ proposals are seeking to refocus the attention from the timeframe of a bonus payout to the performance period that determines its size.

“At present the risk is that with annual performance still driving the bulk of incentive pay, it is still the annual horizon on which the individual focuses,” Mr Lee said.

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