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If business performance is poor, manager's compensation should also decline

The remuneration policy used by banks continues to be a source of controversy in public discussions. Daniel Senn, Head of Financial Services and member of the Executive Board of KPMG Switzerland, analyzes the latest developments and trends in the area of remuneration schemes and the legal provisions that govern them.

Daniel Senn
Daniel Senn
Are salaries in the financial sector too high ?
Daniel Senn: That's a sociopolitical question that we really can't provide a conclusive answer to. There are two sides to the issue. One of them is the whole moral-ethical discussion about what constitutes a fair and reasonable salary. The second is an examination of economic performance: That should help explain where and through whom a bank's profits have actually been earned and who bears the risk and responsibility for them. Refinements are being made to this type of examination on an ongoing basis. That is also the focus of FINMA's latest circular, "Remuneration Schemes - Minimum standards for remuneration schemes of financial institutions,” which addresses direct responsibility and linking the work performed to the remuneration received. I can comment on that as an auditor.

Then what is an auditor's perspective, somebody whose professional maxim is a "true and fair view”? How transparent should salary policies be both in general and with regard to the compensation actually paid ?
Senn: Transparency is vital and, from an accounting perspective, a fundamental right of stockholders who need to know the total amount of remuneration paid out to members of the board of directors and the executive board. On the other hand, I also consider it important to adequately preserve a certain amount of privacy. Public announcements of individual compensation amounts are currently triggering substantial polemics which, in my opinion, are not conducive to a factual discussion.

There is no appreciation whatsoever for aggressive incentive and bonus systems among the population. The "fat cat initiative” has now made this a topic of discussion both among leading politicians as well as the general public. What consequences will this have for banks ?
Senn: Primarily reputation damage. Compensation schemes always need explaining and anybody who has to do this in public is fighting a losing battle. It's true that bonus schemes have to more heavily factor in risk components. Pay has to be linked to performance like it is with somebody who's self employed. In other words: If business performance is poor, managers' compensation should also decline. It's not right for members of upper management to receive a bonus for their good work when business is booming and then, when business flounders, a bonus to keep them in the company. But limits imposed by politics and purely national remuneration rules won't provide a sustainable solution.

Why not ?
Senn: Because this will simply boost the mobility of well-earning employees - a phenomenon already being seen. If the government's influence is too strong, whether through an ordained salary cap or excessive taxation, young people in top positions simply pick up and move to work in another location. That exacerbates both competition between business locations and the war for talent. The latter is a dilemma faced by globally active banks.

Is the introduction of a bonus/penalty scheme realistic or is the concept of management members taking financial responsibility simply utopian ?
Senn: As tempting as it might sound: I consider the introduction of a concrete penalty scheme to be unlikely. In my opinion, many of the recently proposed approaches for either correctly reflecting risk in remuneration schemes or for taxing the bonus components do not constitute effective methods. The result would be that many of the finance specialists affected would move out of regulated areas and instead look for employment in the para-banking sector which is not impacted by these kinds of measures.

From an auditor's perspective, which practicable path would you propose ?
Senn: A bonus must be geared toward long-term criteria and indicators. That's irrefutable. I'm convinced that the best approach is still a stock-based remuneration scheme where the stock cannot be sold during a specific period of time. That gives management a strong incentive to foster the company's sustainable development and remain employed there over the long term.

Individual political players are proposing the introduction of a special tax on bonuses. Is this a sensible remedy for trimming excessive bonus payments ?
Senn: If you ask me, tax initiatives are not an appropriate way to try to regulate bonus payments. In Switzerland, competitive taxes and a moderate tax burden are firmly established as vital, reasonable elements of an attractive business location. Special taxation of salary components, as already practiced in Great Britain, would only provoke a shift in compensation through other constructs. In light of rampant national debt which is placing increasingly greater constraints on upcoming generations' ability to act, a forced increase in the ratio of government expenditures to gross national product would be entirely out of place.

Then which role should the government play ?
Senn: We have to take the "too big to fail” problem seriously and the government has to adapt the conditions in such a way that makes it practically impossible for banks to take system-relevant risks. Riskier transactions need to be reduced to an acceptable level through the payment of adequate insurance premiums or higher capital requirements. The government cannot play the part of a free comprehensive insurance policy.

Regulations are accepted if they give the companies affected and their stakeholders a competitive advantage and avert potential damage. With that in mind, is FINMA's circular a step in the right direction ?
Senn: FINMA has, indeed, established a good foundation for international regulation. However if neither the EU nor the USA move in the same direction and introduce similar regulations, a strict stand-alone solution in Switzerland would put it at a clear competitive disadvantage. Consequently, KPMG is working together with a university to draw up a best-practice study on the topic of remuneration in the financial services sector which we will be presenting to clients and the public before the year is over.

Interview: Andreas Hammer, Brand & Communications
KPMG Switzerland

Daniel Senn
Daniel Senn is a Swiss certified accountant and has served as Head of Financial Services and a member of the Executive Committee at KPMG Switzerland since June 2007. His professional career began in banking. Since joining KPMG in 1997, he has managed engagements for major national and international banks and clients in the funds sector. In addition, he has supervised complex special engagements from the Swiss Financial Market Supervisory Authority (FINMA).

Jeudi 10 Juin 2010

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