Moody’s thinks investment banks are still rewarding their executives too quickly, encouraging them to engage in risky activity, the Financial Times reported.
Following the global financial crisis in 2008, regulators have pushed banks to adopt longer-term pay awards so that executives would be cautious about approving risky undertakings, which could blow up before they can collect their money.
However, the credit rating agency noted in a report that vesting periods of three to five years are “too short to cover tail risks … such as fines and litigation” that can take seven to 10 years to be put into effect, the newspaper said.
It cited the case of JPMorgan Chase, where chief executive Jamie Dimon and his top team receive 50 percent of a given year’s bonus two years later and 50 percent in the third year.
It took the justice department until 2014 to complete its investigation and impose a record fine of US$13 billion for mis-selling of mortgage-backed securities, a practice that dated back to 2005, FT said.
Morgan Stanley, meanwhile, decided on Friday last week to give its investment bankers and traders more of their bonuses upfront, the report said.
James Gorman, the bank’s chief executive, argued that the policy had “created a burden on future year earnings”.
Moody’s said current pay structures are too favorable to shareholders, who usually tolerate more risk than bondholders and who have been given more rights, such as a vote on executive pay.
“Giving shareholders more leverage over compensation plans could have negative implications for bondholders if, for example, shareholders pressed companies to adopt more aggressive pay policies highly focused on earnings per share or total shareholder return metrics with only limited regard to risk,” Moody’s analysts led by Christian Plath said.
The rating agency said Barclays, HSBC and Royal Bank of Scotland would end up with the world’s toughest prescriptions on pay if British reforms, such as a seven-year deferral period, were adopted as planned.
Bank of America, Goldman Sachs, JPMorgan and Morgan Stanley used a three-year deferral period, the minimum recommended by the Financial Stability Board, the newspaper said.
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