EP12: Fixing Broken Bank Executive Pay Frameworks

Sanjiv Anand, Chairman, Cedar Management Consulting InternationalThere is growing global concern that bank CEOs and CFOs are excessively paid, prompting closer review of executive compensation practices. Analysis of leading banks shows that relying solely on short-term financial performance to assess executives is flawed. Banks must balance financial and non-financial measures, such as digital transformation, which strongly influence medium- to long-term success. Poor target setting, especially overly aggressive goals, can encourage risky behavior, particularly in lending, driven by bonus and stock option incentives.Compensation assessment should be comprehensive, including fixed pay, variable pay, and stock options. In some markets, regulators historically focused too narrowly on fixed compensation, overlooking the significant wealth created through equity gains. Vesting periods for stock options are critical: they should begin after two to three years and extend over three to four years to align rewards with sustained performance and risk outcomes. Strong malus and clawback provisions are also essential to recover pay if performance later deteriorates.While pay-for-performance is necessary, boards must ensure fairness, rationality, and responsible compensation multiples across the organization.