Review of Remuneration Policies and Practices in Irish Retail Banks and Building Societies

The Central Bank of Ireland today published the findings of a review of remuneration policies and practices in a number of Irish retail banks. The review assessed whether banks have changed how they remunerate employees, particularly those in senior executive positions, to reflect incoming regulatory standards and the lessons of the crisis. In particular, it examined if banks have ended remuneration practices which fostered inappropriate risk taking or inadequate risk management. The review was conducted in September and October 2010.

The main findings from the review include:

• There is little evidence that banks have self-consciously made a link between their risk appetite and their incentive structures. This exposes banks and, by extension the State, to the consequences of inappropriate risk taking;
• The governance and oversight of remuneration practices is poor. Non-executives need to step-up their scrutiny of remuneration arrangements, and in particular make sure that senior executives’ remuneration is aligned to a bank’s willingness and capacity to take risk;
• In the majority of banks, procedures to determine remuneration are not clear, well documented or internally transparent. There was little evidence of consideration of risk, or collaboration with risk management functions to ensure remuneration policies are aligned with long term strategic plans;
• The majority of banks were found to have given little or no consideration to preparing for the implementation of impending European requirements and guidance on remuneration, which will become effective in Ireland on 1 January 2011. The Central Bank of Ireland expected to find that banks were much more advanced in their arrangements for compliance with these important requirements;
• Some banks are tightening their approach to paying guaranteed bonuses. There is also some evidence of tightening of severance pay, with some banks imposing stricter conditions on golden parachutes. There is, though, further to go;
• All banks reviewed disclose certain information on remuneration externally, but there is little evidence of banks moving to the fuller disclosure required by incoming regulations and guidance from the EU.

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