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Bankers concerned about new limitations on bonuses

Hungarian banks have until August 31 to implement new remuneration policies that place tough restrictions on bankers’ bonuses, financial watchdog PSzÁF told the Budapest Business Journal.

In addition to bonuses for 2011, bonuses from last year that are to be paid after the August deadline also fall under the new regulations, in line with an amendment to the Act on Credit Institutions, PSzÁF said. In addition, credit institutions with a minimum 5% market share in terms of total assets are required to set up an independent committee to oversee remuneration policies.

The global crisis put financial institutions’ wage and bonus policies into the spotlight, the PSzÁF said. Global experiences show that previous remuneration policies did not put a limit on excessive risk-taking and encouraged employees to focus on short-term performance only. The new regulation is expected to help reduce the volume of high-risk transactions. 

The European Parliament approved curbs on bank bonuses on July 7, 2010 as part of wider efforts to limit risks in the banking sector. The new regulation took effect from the beginning of this year.

Target unclear

The amendment targets staff whose professional activities “have a material impact on the risk profile of the bank or investment firm.” These are the employees who make decisions that may affect the level of risk assumed by the institution. Banks enjoy some flexibility as to how the principles are applied in a way that is appropriate to their size, internal organization and the nature, scope and complexity of their activities.

“As this is a pretty subjective approach, most banks took their time identifying those who meet the criteria set by the new law,” an executive told the BBJ. While top management certainly falls under the scope of the new regulations, some mid-managers such as, for instance, the heads of treasury departments or risk and compliance managers are also affected.

Bank managers asked by the BBJ complained that bonuses have already been significantly cut since 2008. Their main problem is that the compensation system has been unpredictable and non-transparent since the crisis. On the other hand, they admit that banks still pay well, much better than any other sector. Private interests aside, they also accept the necessity of linking bonuses to the banks’ overall performance. Bankers’ bonuses typically amount to around three to six months of wages.

Less cash

According to the amendment, the assessment of performance will be set in a multi-year framework of three to five years in order to ensure that the assessment process is based on longer-term performance. Thus, the actual payment of performance-based components of remuneration is spread over the business cycle of the firm.

The guidelines require that a minimum of 50% of bonuses consist of shares of the institution or similar instruments rather than cash.  At least 40% of bonuses must be deferred for three to five years. If a bonus is considered particularly significant in size, a minimum of 60% must be withheld.

Bonuses may be paid only if they are consistent with the financial situation of the institution and are considered reasonable in relation to both the bank's results and the employee's performance.