IIF Global research: top four flaws in financial executive pay

In the heqing of the financial crisis, Wall Street's huge bonuses sparked outrage, and how will the performance-based compensation system "revolutionize" it?　　In March this year, the International Association of Financial Institutions (IIF) and the Austrian latitude consultation completed a three-month 2009 global financial sector executive pay policy survey. June 15, Geawei, a global management partner for the study, said in an interview with Alexander, Grawert, the financial institutions in Europe and the United States seemingly scientific compensation system there are many loopholes, such as the current period of compensation difficult to reflect the long-term business risks, after the problem,　　Remuneration has also rarely been recovered.　　Some international financial institutions have begun to reform the pay system, making performance appraisals cover risk factors, address the issue of delay in the payment of compensation, and establish a pay process that is more reflective of long-term performance. At present, China's Ministry of Finance is studying the development of state-owned financial institutions executive compensation management policy.　　Geawei that the incentive mechanism for senior executives in China's financial institutions should avoid Wall Street's mistakes and fully incorporate risk factors.　　The executive pay should match with the risk Geawei introduction, according to the investigation of several large financial institutions, there are four key defects in the salary approval process. The first is the shortage of salary management structure. The board is very limited in the process of developing a pay structure, and not all board members are involved.　　More than 80% of the agencies have no risk committee involvement in the pay governance function, such as the review of pay policies. "The information disclosure of pay standards is rather inadequate, and the public or shareholder review of the corporate compensation model is limited."　　"Geawei said. The second gap is reflected in the remuneration levels of executives and venture-business personnel. The survey found two core issues, one is the front desk and in the background (internal control) departments between the pay mismatch, the front pay greatly higher than in the background, resulting in the backstage become "second-class citizens."　　Second, a large number of companies in the overall performance losses, continue to pay some business units bonuses, which is the financial crisis was criticized. "The third salient issue is that there is little risk adjustment for the approved remuneration, and there is a gap between the short-term assessment and the long-term nature of the business risk."　　"Geawei said that 50% of the agencies in the survey did not make a risk adjustment in the bonus pool and allocation accounting, and that the risk adjustments for other institutions were based on economic profits or expected losses and still failed to fully reflect the risks (such as liquidity risk)." The mechanism for the payment of remuneration is the fourth area to be vigorously improved. "Many incentives are immediate, short-term cash payments, and better incentives should be deferred payments."　　"Geawei thinks. However, the survey found that the delay in the return of remuneration is not enough control, that is, once the money fell into the bag for Ann, it is difficult to recover or punish. Most organizations deduct part of the deferred remuneration for employees who leave because of fraud or misconduct, but few institutions penalize employees or departments for future underperformance. Even if the pay is deferred for 2-3 years, it is oftenShorter than the period of business risk. One example is that, by the end of 2007, the first 9 banks that received financial rescue funds from the US government owed senior management pensions and deferred bonuses of more than 40 billion dollars.　　This means that some of the money the government aims to ease the liquidity crisis in banks may fall directly into executive pockets. "Good early performance, high bonuses, but later problems, the early bonuses will not be withdrawn, this is the problem."　　"Geawei said. There is no doubt that letting risk and long-term performance speak is One Direction for the future.　　Respondents pointed out that the focus of the 2009-year pay change is to improve the performance evaluation index and distribution process used in the bonus approval, and to incorporate the risk factors into the compensation process. China's pay reform: The key is the long-term incentive China is also in the reform of the pay system, the Ministry of Finance is working with the relevant departments to develop state-owned financial institutions executive compensation management policy.　　There is no shortage of controversy around this topic. On the one hand, the cadre appointment mechanism of financial enterprises and the interest rate protection of financial enterprises make the tens of thousands of executives pay a target.　　On the other hand, the existing remuneration system does not seem to have much appeal to senior talent. Cai, Asia's chairman of UBS Investment Bank, asked a senior bank executive at a recent forum that the annual salary of one of China's financial executives was only 1.5 million and 2 million, equivalent to the 26-30-year-old income of the most grassroots staff in foreign capital.　　Why should China be more international and attract talents? Su Ning responded that China's wage-limit reform is mainly aimed at state-owned financial institutions, because the appointment of senior executives of state-owned financial institutions is not completely market-oriented, and their bosses are the state and can be asked to pay a cut. Therefore, the state-owned enterprises pay limit, will not cause the brain drain of state-owned enterprises.　　Of course, non-foreign or non-state-owned financial institutions still have the autonomy to decide on wages, but it does have the potential to lead to a wage gap between the two. "The issue of the IIF survey also applies to China.　　"It is more urgent to pay attention to China's executive pay system than the income figures," Geawei said.　　Zheng, director of compensation and welfare at the Greater China region, said they had found, through a survey of executive pay at the Shanghai and Shenzhen 300 companies, the growth in corporate profits is proportional to the increase in executive pay, but a key issue is that shareholders ' concern about performance should not be just a net profit for the current period, but also a risk factor, which has not been agreed in the industry. "It is important that the performance of the IIF survey be adjusted for risk," he said. At present, the domestic financial industry is rarely in the performance of the risk adjustment, some banks in the incentive allocation of the concept of economic value added, but this is only to consider the opportunity cost of different capital, from the risk point of view, or lack of overall consideration.　　"Zheng said. Considering the matching of incentive and risk, the compensation system of Chinese financial enterprises is also a very elementary stage, he said. In terms of form, compared with the prevailing western stock incentives and deferred payments, most of the executive pay is mainly made up of short-term incentives, such as "basic salary + performance wage", in the medium and long termThe incentive mechanism is almost blank. Therefore, to explore the possibility of medium and long term incentive is the direction of China's financial executive compensation system reform.　　Zheng said the state-owned banks are also exploring the establishment of pay delays, mainly to match the revenue of executives to the time span of risk.　　In the early years, ICBC, CCB and Bank of China had designed the stock appreciation rights scheme when they were listed in H shares, but they are still frozen. "I think regulators are more concerned that equity incentives or option incentives are a double-edged sword that can link the interests of executives and shareholders, but if poorly designed, they tend to lead to short-term behavior."　　"Geawei said. So avoiding the financial crisis that has exposed Wall Street's pay-system mistakes is crucial. "For example, deferred payments must be linked to performance over the next few years, with a punitive mechanism to establish a certain mechanism of prosecution, and if your performance is not good, the remuneration of shareholders before you can be returned by legal means." "Zheng thinks.