16 October 2008
Letter to Hector Sants at the FSA
10th October 2008
Hector Sants
Chief Executive Officer
The Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Dear Mr Sants,
Banking Bonuses
In your speech about principled-based regulation on 15th May you spoke of your concerns about asymmetrical risk in the compensation schemes of securities traders. You mentioned the need for payment schemes where employees and shareholders shared more properly in the upside and downside of risks. Recent events have further reinforced the importance of your remarks! I was pleased to see in yesterday’s Financial Times that the FSA is preparing a Code of Conduct on banking bonuses.
You are absolutely right that the structures and incentives associated with banking pay have been a major factor in the development of the current crisis, and need urgent attention. This is especially important for the very top people in banks, to whom securities traders ultimately report. If executive directors and top managers have the right risk symmetry then appropriate incentives should be expected to cascade down the organisation without the need for too much prescription. My book (enclosed) makes a rigorous examination of the incentives that arise for executive directors. It makes important recommendations of how the incentives can be improved and made much safer for the longer term. I hope that your team working on the Code of Conduct will be able to make good use of the book.
There is, of course, an existing Code of Conduct on executive pay included in the Combined Code, administered by the Financial Reporting Council. This code has been singularly unsuccessful on the issue of executive pay, and any new Code of Conduct must take account of the reasons for this. An analysis of the problems is displayed at:
http://performanceandreward.blogspot.com/2006/04/combined-code.html.
With best wishes for your difficult job in these most difficult times.
Yours sincerely,
Revd Patrick H. Gerard
Chief Executive Officer
The Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Dear Mr Sants,
Banking Bonuses
In your speech about principled-based regulation on 15th May you spoke of your concerns about asymmetrical risk in the compensation schemes of securities traders. You mentioned the need for payment schemes where employees and shareholders shared more properly in the upside and downside of risks. Recent events have further reinforced the importance of your remarks! I was pleased to see in yesterday’s Financial Times that the FSA is preparing a Code of Conduct on banking bonuses.
You are absolutely right that the structures and incentives associated with banking pay have been a major factor in the development of the current crisis, and need urgent attention. This is especially important for the very top people in banks, to whom securities traders ultimately report. If executive directors and top managers have the right risk symmetry then appropriate incentives should be expected to cascade down the organisation without the need for too much prescription. My book (enclosed) makes a rigorous examination of the incentives that arise for executive directors. It makes important recommendations of how the incentives can be improved and made much safer for the longer term. I hope that your team working on the Code of Conduct will be able to make good use of the book.
There is, of course, an existing Code of Conduct on executive pay included in the Combined Code, administered by the Financial Reporting Council. This code has been singularly unsuccessful on the issue of executive pay, and any new Code of Conduct must take account of the reasons for this. An analysis of the problems is displayed at:
http://performanceandreward.blogspot.com/2006/04/combined-code.html.
With best wishes for your difficult job in these most difficult times.
Yours sincerely,
Revd Patrick H. Gerard
Labels: Bonus, Code of Conduct, FRC, FSA, Hector Sants, trading
