Leaders in Davos Privately Critical of Banker Bonuses and Unchecked Egos
The Davos annual World Economic Forum may be officially over, but news continues to trickle down from the slopes of that Swiss enclave of financial masters.
Apparently, several business leaders speaking candidly during closed meetings criticized hefty bonus packages for bankers and other executives, while stopping short of advocating caps imposed via regulation.
Many remained critical of regulatory efforts to cap executive pay, but one banker at the Swiss Alps forum blamed overly generous compensation packages on a lack of shareholder intervention, Reuters reports.
"It should be up to the boards, not the regulators. Where are the shareholders of these banks?" a U.S. investment banking leader told Reuters. Like others who spoke about the issue, the investment bank executive declined to be named.
As to why shareholders have often remained on the sidelines when it comes to executive pay, a speaker who was on a panel for compensation at the Davos meeting said institutional investors have failed to become engaged on the subject because the amount of money that is involved is “immaterial."
And, when asked for a show of hands on whether executive compensation should be regulated, nobody in the audience of nearly 100 people raised their hand.
Those speaking on the condition of anonymity were more candid.
The investment banking head privately blasted banking leaders for failing to contain their egos. Many bankers have come to believe that they personally—and not their corporate roles—are directly responsible for the profits generated in their business, he said.
"It's the seat, not the individual,” the banker told Reuters, adding, “I resent some 30-something smart alec being paid $3 million."
Some executives here also advocated more effective tax collection from the best paid.
One hedge fund manager reportedly confided the belief that bankers' bonuses should be deferred for three years in order to allow the effects of the individual's actions to be measured properly over the course of an economic cycle.
Deferrals as a component of the compensation mix has, of course, already been increasing in the financial services industry, said Gary Parr, vice chairman of investment banking group Lazard Ltd. Parr believes in mechanisms to recoup bonuses from bankers if their bets or advice turned sour further down the road. Clawbacks are a rational part of the compensation structure for companies that have big risk portfolios, he told Reuters,
One regulatory official said a combination of limiting the cash component of bonuses and imposing a deferral could help wean banks from a short-term bonus culture. But the rules on remuneration needed to be radically simplified, he said.
Meanwhile, the investment banker concluded "In a world where return on equity is more difficult because you have higher capital requirements and lending produces fewer returns because you have lower interest rates, compensation has to follow. I do believe that for the bankers, this is not an easy transition for them. But I am convinced the companies understand this. Now they just have to build it into their institutional culture."