The effectiveness of remuneration committees in European banks. Regulation and best practices
| Date | 11 November 2013 |
| Pages | 373-396 |
| DOI | https://doi.org/10.1108/JFRC-11-2012-0046 |
| Published date | 11 November 2013 |
| Author | Antonio Dell'Atti,Mariantonietta Intonti,Antonia Patrizia Iannuzzi |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
The effectiveness of
remuneration committees
in European banks
Regulation and best practices
Antonio Dell’Atti and Mariantonietta Intonti
Department of Business and Private Law, University “Aldo Moro” of Bari,
Bari, Italy, and
Antonia Patrizia Iannuzzi
Department of Legal, Historical, Economic and Social Sciences,
University “Magna Graecia” of Catanzaro, Catanzaro, Italy
Abstract
Purpose – Following the subprime crisis and the detrimental role played by remuneration practices,
an important reform concerned bank remuneration committees, especially in “significant financial
institutions”. In light of this consideration, this paper aims to investigate the scope and format of this
renewal in order to verify whether and how those bodies are conforming to the new regulatory
framework while improving their efficiency and functionality.
Design/methodology/approach – The study was carried out on 30 top European banks through
the elaboration of a qualitative analysis model that takes into account both the procedural and the
compositional aspects of remuneration committees. The model was used as a benchmark for assessing
the effectiveness of the remuneration committees operating within a sample. This assessment was
carried out according to the content analysis approach.
Findings – The results show a high diffusion of these bodies within the banks and a gradual
expansion, during the time under investigation (three years 2008-2010), of the information provided by
them on their tasks and decision-making. In the same time, the study highlights some important
criticalities concerning both the composition of the banks’ remuneration committees, how they carry
out their functions, and the level of disclosure addressed to shareholders and the market in order to
formalize the results of their work.
Originality/value – The added value of the analysis is related to the implementation of an
“effectiveness remuneration committee rating” applied to a sample of top European banks during the
financial crisis.
Keywords Effectivenessrating,European banks, Remunerationcommittee,Management compensation,
Remunerationpolicy, Regulation
Paper type Research paper
1. Introduction
The detrimental role played by bank remuneration practices in the recent financial
crisis, highlighted both in the literature (Mottura, 2008) and by the regulators Financial
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
JEL classification – G21, J33, G35
Even if the study reflects a common view, Antonio Dell’Atti mainly contributed to Sections 1
and 5, Mariantonietta Intonti to Sections 3, 4.1 and 4.3, Antonia Patrizia Iannuzzi to Sections 2,
4.2 and 4.4.
Journal of Financial Regulation and
Compliance
Vol. 21 No. 4, 2013
pp. 373-396
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-11-2012-0046
The effectiveness
of remuneration
committees
373
Stability Board (FSB, 2009a, b; CEBS, 2010a, b; BCBS, 2010), shows the importance of
addressing compensation governance and the need to calibrate the calculation
methods.
The responsibility for governance and for the structure of executive pay systems is
essentiallyattributable to the board (Kesner, 1988; Daily et al., 1998),but a significant role
is played by compensation committees, bodies whose constitution has long been
recommendedby the standards of self-regulation in corporategovernance (CG). The most
recent regulation has focused attention on compensation committees, emphasizing their
role and the strategicimportance of good practicesrelated to pay packages (Bank of Italy,
2011; European Parliament and Council, 2010), especially in larger financial institutions
(FSB, 2009a). The same regulation acknowledges the fundamental and delicate role
played by such committees in the overall process of defining, implementing and
monitoringbank compensation practices (CEBS,2010a). Furthermore, regulators provide
detailed guidance on their composition and operating procedures, which is necessary to
enable them to carry out committee tasks in a consistentand effective way.
Based on these considerations it was considered useful to conduct an analysis on the
activities of remuneration committees in financial firms. To this end, the research
questions are the following:
RQ1. What are the requirements for the compensation committee to be effective,
i.e. is it possible to identify an “ideal” banking compensation committee?
RQ2. What is the degree of effectiveness of the committees in a sample of top
European banks and how has this evolved during the financial crisis?
Since the survey period will cover the years between 2008 and 2010, it will be the first
study to check the impact of the recent financial crisis on the operations and
effectiveness of bank compensation committees.
The paper is organized as follows. Section 2 analyzes the literature on compensation
committee and Section 3 concerns the regulation; then follows the empirical sectio n,
whose main outputs are to elaborate a “remuneration committee effectiveness rating”
and to highlight the choices on composition, functions and disclosure of such bodies
carried out by a sample of financial firms (Sections 4). Section 5 concludes.
2. Literature review
As is well known, many studies show that in firms with better governance there are
less instances of opportunistic behavior by managers. Better governance, indeed, helps
to align the interests of managers and shareholders boosting the firm’s financial value
and positively impacting the structure of managerial remuneration (Acharya and
Volpin, 2010). Moreover, in the case of banks, good governance allows such firms to
“allocate capital efficiently and less likely to fail” (Mullineux, 2006).
Among the variables of governance that most affects the drawing up of
compensation policies, the remuneration committees, responsible for the design,
management and monitoring of executive remuneration, plays a central role. It is clear
that improving the quality of such bodies can only positively influence the pay
packages, especially regarding incentive schemes, mitigating agency problems and
increasing the alignment of interests between managers and shareholders. In turn, this
circumstance is reflected positively in the firm’s performance: if executive compensation
can reduce agency costs, the financial performance of the company can only improve.
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