Regulators are fretting over the structure of bankers' pay; shareholders should be more worried about the size of it.

The UK’s new senior managers regime (SMR) for banks will take shape in 2015. Two interlinked aspects are causing alarm among banks and their lawyers. First, there is a requirement for senior executives and board members to sign declarations that they have done everything possible to prevent poor risk management or misconduct. Second, there are the provisions that require bonuses to be deferred for three years, and subject to clawback for up to seven years. The regulators are set to consult on extending the deferral period for certain key actors.

The chain of events is easy to foresee: if a serious failure of risk management or act of misconduct occurs that contradicts a senior manager’s SMR declaration, up to seven years later, their bonuses are on the line.

Banks are already looking to take evasive manoeuvres to defuse the toxic political atmosphere around bonuses. The European Banking Authority (EBA) scotched the idea of using role-specific allowances in November 2014, making clear that they should be classified as part of variable rather than fixed pay. Other alternatives include the Scandinavian model of vesting bonuses into pension schemes – favoured by the EU’s high-level expert group that was chaired by Erkki Liikanen. Or the football model of multi-year negotiated fixed-pay packages.

Inevitably, regulators are already planning how to catch up with the market. Bank of England governor Mark Carney suggested in a speech in Singapore late last year that even part of senior executives’ fixed salaries should be paid in bail-in bonds that would face a haircut if the bank gets into trouble.

But perhaps the arguments over the structure of bankers’ pay are missing the real issue: the quantum of it. Bank of England deputy governor Jon Cunliffe has pointed out that for the 10 years leading up to the financial crisis, shareholder returns at the largest global banks averaged 60% of the paybill. In 2013, the ratio was just 25%. Put bluntly, bankers’ pay has not adjusted to the lower returns their institutions are generating for shareholders.

Time for shareholders to take a tougher line, rather than waiting for regulators to set the tone? The EU thinks so. While the SMR has been making headlines, there has been less attention so far on the European Commission’s April 2014 proposal to enhance long-term shareholder engagement and corporate governance. The European Parliament is now discussing the idea – it could yet feed into the debate on bankers’ pay.

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