Banks should reform remuneration practices and lower overall pay, according to a paper by Hermes Equity Ownership Services.
Epidemiology – next steps for banking regulation, puts forward five interventions to tackle current problems in the banking industry.
One of the interventions is to reform remuneration practices to lengthen performance periods, so that bonuses are paid over a three-year period, and lower overall pay levels so that the compensation pools account for less than 50% of revenues.
Paul Lee, director of policy at Hermes Equity Ownership Services, said: “We have not been short of evidence in our search for the symptoms of the underlying disease of the banking sector.
“It is clear that fundamental change is still needed, and if the industry does not voluntarily take on board such changes, then calls for the politicians and regulators to take decisions on their behalf will only build further.”
Tom Gosling, head of the reward practice at PricewaterhouseCoopers, added: “The Hermes’ announcement demonstrates the vigour with which shareholder bodies are engaging with banks on both the level and structure of pay.
“This emphasises how important it is for firms to have a clear articulation of why they pay what they do, and how this is consistent with acceptable returns to shareholders.
“We are likely to see some radical reform of executive pay in banks, particularly in Europe where significant regulation to limit incentives is likely. Abandoning bonuses will be right for some, but not all.
“In all of this, we need to remember that focussing on what people are getting paid for, and how much, is more important in influencing behaviour and culture than continued changes to the structure of pay.”