SIGNING-ON AND retention bonuses have been paid to senior executives in a number of banks since January 2009, a Central Bank review of pay practices and policies at the banks has found.
In a highly critical report, the Central Bank found that the banks had not made sufficient changes to pay practices and policies which had “fostered inappropriate risk taking and inadequate risk management” over the past decade.
The findings of its review were “discouraging”, the Central Bank said, and warned the banks to overhaul their pay policies before another review in 2011 or else face enforcement action and fines of up to €5 million under new rules.
The Central Bank found that the banks had started changing pay practices but that only one bank had “taken an obvious lead” in making adequate changes.
“If a bank is not employing the right financial incentives, it is not managing the risks – it’s as simple as that,” said Jonathan McMahon, head of financial institutions supervision at the Central Bank.
The review – carried out in September and October – found there was little evidence that the banks had “self-consciously made a link between their risk appetite and their incentive structures”.
This exposed banks and the State to the consequences of inappropriate risk-taking, the Central Bank said.
The banks had made changes to paying guaranteed bonuses and there was also evidence of changes to severance pay with some imposing stricter conditions on “golden parachutes”.
However, the banks had “further to go”, the Central Bank said.
Chief executives at all regulated banks and building societies received letters from the Central Bank yesterday warning them to introduce changes to pay practices before next year’s review.
“The link between remuneration and risk management remains poorly defined, poorly articulated and poorly governed,” Mr McMahon said in the letter.
“Unless remuneration arrangements are given a more definite form, banks risk repeating past errors.”
The banks were told that the financial crisis may have been largely home-grown but that inappropriate remuneration practices were also to blame.
The Central Bank said non-executive board members needed to step up their scrutiny of pay and to make sure that senior executives are paid in line with a bank’s “willingness and capacity to take risk”.
“It is clear that boards need to become much more objective and independent in their monitoring of remuneration and less accommodating in their bargaining with employees and potential employees,” Mr McMahon said.
In the majority of banks, procedures to determine bankers’ pay were “not clear, well documented or internally transparent”, according to the Central Bank.
Most banks were found to have given “little or no consideration” to preparing for new European rules on bankers’ pay which come into effect on January 1st.
While the banks disclose certain information on pay, there was little evidence that they were moving to the full disclosure required under new rules.
