Executive remuneration in the UK financial sector is "wildly out of line" with other parts of the market, according to outgoing IMA chief executive Richard Saunders.
Giving evidence to the Treasury Select Committee this morning, alongside ABI chief Otto Thoresen and NAPF head of corporate governance David Paterson, Saunders discussed executive pay and this year’s ‘shareholder spring’ which has seen investors revolt against excessive remuneration.
Commenting on banker pay, Saunders (pictured) said: “Expectations about earnings within the financial sector are wildly out of line with most other sectors of the economy - and that is a cultural issue."
Paterson added: “Remuneration in banks has fallen over the last four years, reflecting the fact profits are down. But the culture has not changed. Why hasn’t it changed? I find that hard to answer.”
Thoresen said dialogue between company boards and shareholders has improved significantly, but has a long way to go. “It is fair to say that the level of engagement between entities and investors, and the effectiveness of that engagement up to Q3 last year was not very good. There was discussion but not a lot of change. It is now beginning to change, but it is not uniform and not fast enough.”
However, Saunders said he does not see any problem with the way fund managers are remunerated, and dismissed suggestions of short-termism in the pursuit of higher rewards.
“There is substantial performance-related remuneration in asset management to align fund managers’ interests with those of their clients.”
Meanwhile he blamed corporate governance failings for the collapse of major UK financial institutions during 2008, and called for improved regulation to protect taxpayers in future.
Saunders said the UK has “blazed a trail” compared to the rest of Europe, pointing out it was the first country to recapitalise it banking sector. The Independent Commission on Banking will be a further step in driving positive regulatory reform, he added.
“Good corporate governance is extremely important in SIFIs (systemically important financial institutions) and governance failings were a contributory factor in the failure of some institutions in 2007-2008. What distinguishes a SIFI from other large companies in which investors may have holdings, however, is that if it fails there is no option but for the government and taxpayer to step in. That calls for a public policy and regulatory approach to protect the taxpayer,” he said.
“This can be seen currently in the Capital Requirements Directive IV and the Crisis Management Directive, both of which are under consideration at EU level and aim to introduce appropriate regulation to ensure that the tax payer does not bear the burden of failure.”
Asset managers’ clients would be less vulnerable than savers if a firm failed, because of the way their business models are structured, Saunders said.
“As institutions, buy-side institutions are quite small. While they may be managing billions of pounds of assets, those assets are held separately from the manager.
"In the event of the asset manager failing the only people affected are the shareholders and employees of that institution – not individual investors.”
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