Institute Recommends Compensation Changes
The Institute of International Finance is recommending Wall Street' securities firms make their pay practices more transparent and tie compensation more to market risk.
Earlier this year the group was reported to be drawing up a wide-ranging recommendation to revamp, among other things, the way bonuses are awarded. Its 200-page report claims to establish "best practices" for banking industry compensation. By aligning pay with risk-adjusted performance and adopting the report's recommendations, the group says, Wall Street could move closer to regaining confidence of shareholders and policymakers rattled by mounting bank closures and sub-prime failures.
IIF Board Chairman Josef Ackermann, who's also chairman of the management board of Deutche Bank AG, says incentive pay is a weakness in Wall Street's business practices and will require the industry to exercise greater self-discipline on compensation-related issues. "We are convinced that adoption of the Principles on Compensation that we have set out will play a meaningful role in strengthening our industry and ultimately public confidence," he said. He indicated some firms have already taken actions consistent with the report.
Among the IIF's recommendations:
· Compensation incentives should be based on performance and should align with shareholder interests and "long-term, firm-wide profitability, taking into account overall risk and the cost of capital."
· Firms should ensure that compensation incentives do not induce risk-taking in excess of their risk appetite.
· Firms should account for realized performance for shareholders over time in determining severance pay.
Other recommendations were aimed squarely at derivatives and those strutured products created from bundled mortgages and student loans, that have contributed significantly to the current market turmoil. To remedy future damages caused by these products, the report called for firms to allocate incentive pay with deferred or equity and improved management review and oversight to ensure that compensation policies are consistent with the firm's risk appetite.