FINANCIAL SERVICES
Walker Review recommends increased disclosure on banking pay
Big banks and the largest building societies will be required to reveal how many of their employees earn more than £1 million. But “high end” earners names will not be revealed under new legislation to be introduced following the recommendations of the Walker Review.
The Walker Review also recommends that at least half of variable pay or bonuses should be paid in the form of a long-term incentive scheme with half vesting after three years and the rest after five years. Two-thirds of cash bonuses should also be deferred.
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The ex-City regulator Sir David Walker was commissioned by the government in February 2009 to undertake an investigation into pay in banks and other financial institutions as part of a general review examining the corporate governance of financial services firms. The Walker Review – as it inevitably became known – produced a set of proposals for wider consultation in July 2009, and final recommendations were published 26 November 2009.
Sir David is a former executive director of the Bank of England, and former chairman of the Securities and Investments Board. He is now a senior advisor at Morgan Stanley International.
His report – A Review of Corporate Governance in UK Banks and Other Financial Industry Entities: Final recommendations – contains a daunting 39 separate recommendations dealing with Board size, composition and functions, the role of shareholders, governance and risk, and remuneration structures.
Remuneration recommendations
Among the key recommendations on remuneration are the following:
Remit of the remuneration committee extended to cover all aspects of remuneration policy on a firm-wide basis, particularly from a risk standpoint, as well as giving the committee direct responsibility for the pay of all highly-paid employees.
Greater pay transparency in the big banks by requiring public disclosure of the number of employees earning more than £1 million, broken down by bands of pay.
At least half of total variable pay must be in the form of a long-term incentive scheme with vesting subject to a performance condition – half of the award vesting after not less than three years and the remainder after five years.
Bonuses should be paid over a three-year period with not more than a third in the first year.
Clawback should be used as the means to reclaim amounts in limited circumstances of “misstatement and misconduct”.
Other recommendations deal with minimum levels of shareholding for board members and high-end execs; the obligation of remuneration committees to seek advice from the board risk committee on the risk-adjustment of performance measures; tougher rules on what happens if a firm’s remuneration report is not clearly approved by shareholders; greater disclosure around non-standard pension rights; and a code of practice for remuneration consultants.
It is proposed that the recommendations on pay disclosure should be enforced through legislation in the forthcoming Financial Services Bill.
Want to know more?
Title: A Review of Corporate Governance in UK Banks and Other Financial Industry Entities: Final recommendations, Sir David Walker, 26 November 2009.
Availability: You can download the 184-page document in PDF format from the HM Treasury web site at
www.hm-treasury.gov.uk/walker_review_information.htm.