UK panel blames bonus-driven pay practices for banking crisis

At a time when the British economy continues to reel under recession, an expert panel has blamed "reckless" risk-taking stoked by bonus-driven executive compensation practices as the prime reason for the nation's banking crisis.      

The UK Treasury Committee report said the banking crisis has exposed serious flaws in remuneration pattern in the sector.      

"Bonus-driven remuneration structures led to a lethal combination of reckless and excessive risk–taking. The design of bonus schemes was not aligned with the interests of shareholders and the long–term sustainability of the banks and has proved to be fundamentally flawed," Committee Chairman John McFall said in a statement.      

The Committee has the mandate to examine the expenditure, administration and policy of Treasury and other public bodies including the Bank of England and the Financial Services Authority.      

Coming down heavily on the compensation trend, the report on banking crisis noted that non-executive directors are "all too willing to sanction the ratcheting up of senior managers' pay, whilst setting relatively undemanding performance targets".      

The global financial turmoil has taken a severe toll on UK banking system, forcing the government to partially nationalise entities like RBS and Lloyds. Even though, there is a strong case for stopping bonus payment for senior people at part-nationalised entities, the Committee said such a move would make it difficult for these banks to retain staff.      

"... Whilst there is a strong case for curbing or stopping bonus payments for senior staff in Lloyds Banking Group and Royal Bank of Scotland, the position of the banks would be worsened if they could not make bonus payments," the report noted.      

The Committee added there should be transparency and accountability regarding pay packages and performance.      

"If bonuses were prohibited at the part-nationalised banks, they could struggle to retain and recruit the staff they need...," McFall said.      

He noted that, however, as a major shareholder, the taxpayer is also entitled to transparency and accountability regarding pay structures and how they relate to performance.      

"Rewards for failure must not be repeated. This applies not just to Lloyds and RBS, but across the board," he said.     

Rattled by financial crisis, the UK economy shrank 1.9 per cent in the first quarter of 2009.      

The Committee also noted that the crisis has revealed shortcomings in the system of non-executive oversight of bank executives including lack of time on the part of many non-executives to carry out their roles.