Soon after the financial crisis, international regulators identified Wall Street’s lush pay packages as one of the culprits and proposed an overhaul that was meant to apply equally to employees of American investment banks and their big European rivals.
Four years on, the Europeans might be forgiven for wondering what happened to the American effort.
A central theme of the overhaul was to make bankers wait for a significant portion of their pay, so they would have less of an incentive to take the sort of short-term risks that led in 2008 to crippling losses.
Today, however, European firms appear to be holding back, or deferring, substantially more of their top risk-takers’ pay than American banks.
European banks like Barclays and Credit Suisse are deferring as much as 70 percent of the compensation granted to top employees, according to an analysis by The New York Times of the banks’ annual reports. American firms, by contrast, generally appear to be deferring about half.
The compensation overhaul is one of the less recognized efforts to strengthen the financial system. But when it began in 2009, government officials around the world had high hopes for it.
“Action in all major financial centers must be speedy, determined and coherent,” the Financial Stability Board, a body based in Basel, Switzerland, that comprises national financial regulators, said. “Urgency is particularly important to prevent a return to the compensation practices that contributed to the crisis.”
The pay measures apply to more than just a bank’s chief executive and other top-level officers. Large banks are now required to identify the biggest risk-takers and tie their compensation to the fates of their firms. There could be hundreds of such employees at a single large bank. The importance of spreading the net wide was highlighted last year when obscure traders at JPMorgan Chase incurred $6 billion of losses in complex wagers in what became known as the “London Whale” trades.
A trader affected by the pay measures who gets a $2 million bonus in one year might get half of that soon after it is awarded. The trader would typically get the rest over a three-year period that begins a year after the bonus is awarded. During the waiting period, the bank can take back the deferred pay if the trader’s bets sour.
Certainly, American institutions like Citigroup, Goldman Sachs and JPMorgan Chase are deferring considerable amounts of pay. But the Europeans are going further.
Last year, the investment banking divisions of Credit Suisse and Barclays, which compete on Wall Street, deferred 72 percent of the total compensation earned by risk-taking employees, according to figures in their annual reports. Deutsche Bank deferred 57 percent in its investment bank last year.
Exact comparisons with American banks are hard, because they do not release pay data for all their regulated risk-takers. But British regulators do require the American firms to provide data for such employees in their London subsidiaries. These make a significant contribution to the American banks’ overall trading and deal-making revenue.
Filings for 2011, the most recent available, show that only 40 percent of compensation was deferred for employees at Citigroup’s global markets operations in London. The figure was 43 percent for Morgan Stanley’s London operations and 44 percent for JPMorgan’s. Bank of America deferred 49 percent of London employees’ pay.
Barclays, in contrast, deferred 70 percent of its regulated employees’ compensation across the whole firm in 2011. Credit Suisse deferred 60 percent.
In a statement, a Citigroup spokesman, Mark Costiglio, said, “Citi’s incentive compensation plans are appropriately disclosed and administered through a strong governance process that aligns employee compensation with the long-term interests of all stakeholders and ensures that employee compensation does not incent excessive or imprudent risks.”
In 2012, Morgan Stanley appeared to be an outlier among American firms. Most of the bonuses for top employees, excluding financial advisers, were deferred. Specifically, if total compensation was over $350,000, and the bonus was over $50,000, the entire bonus was delivered over three years. Mark Lake, a spokesman for the bank, declined to say whether that approach would be used for future years’ compensation.
JPMorgan and Bank of America declined to comment. The filing for Goldman Sachs’s London operations did not contain enough data to determine how much pay it deferred.
The Federal Reserve, which oversees compensation at large banks incorporated in the United States, has chosen not to dictate pay levels. It has, however, put a big emphasis on getting banks to carefully construct employment contracts that allow them to take back compensation if investments show losses or fall short.
It is hard for outsiders to tell if the Fed’s approach is having the desired effect. But there may be a way for banks to skirt its impact. They could simply pay out a large share of compensation upfront, as seems to be their practice.
Once the regulated employees have received that pay, it is, from a legal standpoint, much harder for banks to reclaim it. But if the American banks were deferring as much as their European rivals, the clawback provisions that the Fed is keen to see would apply to a bigger portion of their pay.
“You can do everything right in financial reform, but if you don’t get the incentives right, everything is potentially for naught,” said Dennis M. Kelleher, president of Better Markets, an advocacy group that favors strong regulation of banks.
Barbara Hagenbaugh, a Fed spokeswoman, did not comment when asked how well its pay overhaul was working. She added that American banks would expand their pay disclosures in regulatory filings in the future, but she did not give a date.
Stricter regulation may not be the only reason that European banks are withholding more pay. Deferrals may also help financial results for the banks, which have struggled in the Continent’s economic slowdown. When pay is deferred, it typically is not counted as an expense until later periods, which increases nearer-term earnings. As a result, if their overall financial performance strengthens, European banks may choose to defer less.
At the same time, a recently passed law may undermine regulators’ efforts on pay deferrals at European banks. The law, approved by European lawmakers in April, forces strict caps on pay at banks in the European Union.
One provision of the law will ordinarily restrict bonus payments to one year’s base salary. Pay specialists in Europe expect the banks to adapt to this rule by substantially increasing base salaries. With banks paying out a lot more in salaries, employees would get a higher share of their pay immediately. They would also get substantially less from deferred bonuses, the part of compensation that is supposed to hold the risk-takers accountable.
“You would have less available for deferral and clawback,” said Alistair Woodland, a partner at Clifford Chance, a law firm based in London, “and it undermines the good work that has been done.”
© The New York Times 2013