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Top bank executives expose pay myths in Scandinavian example

Thursday, March 16, 2017 - 10:32

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CEO of Nordea Bank AB, Casper von Koskull, earned 2,457,528 euros (S$3,700,470) in fixed and variable salary, benefits and pension benefits last year, when investors enjoyed total returns of 16 per cent.

[COPENHAGEN] Some of the world's best-performing banks are run by executives who make a fraction the amount that their more famous counterparts pull in.

Annual reports now being published show the chief executive officers of the Nordic region's six biggest banks last year earned roughly half as much as their peers elsewhere, despite dominating European rankings on returns and capital adequacy, according to calculations by Bloomberg.

Take Casper von Koskull. The CEO of Nordea Bank AB, Scandinavia's only global systemically important lender, earned 2,457,528 euros (S$3,700,470) in fixed and variable salary, benefits and pension benefits last year, when investors enjoyed total returns of 16 per cent.

Or Thomas Borgen, CEO of Danske Bank A/S (which now boasts a market value bigger than Deutsche Bank AG's). Last year, he earned about US$2.6 million, including pension benefits. That's less than half the amount paid to his counterpart at Lloyds Banking Group Plc, and about 40 per cent below the pay given to the CEO of Standard Chartered Plc.

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Sweden's government says executives risk public anger if they earn too much. Banks should be aware that "excessive bonus programs and especially programs that make it profitable to take risks that are irresponsible, are perceived as negative by the general public", Financial Markets Minister Per Bolund said in an interview.

The Scandinavian experience might embolden some European boards as they work on cutting bonus pools for bankers in the region.

In general, top earners at Nordic banks make about a third less than the European average, with total pay packages falling into the bottom third of pay rankings, figures compiled by the European Banking Authority show.

The best paid Nordic bankers earn considerably less than their counterparts in Greece, Cyprus, Spain and the UK, according to the February report, which looks at pay across 22 European countries in 2015.

Return results suggest bank executives don't need to reap huge salaries to do an above-average job. In fact, some research indicates that bigger pay checks may encourage the kind of risk-taking that ultimately harms banks and the economies they operate in.

The EBA says there's evidence that remuneration packages can play a role in how likely bankers are to break rules. Poor pay practices encouraged some bankers to sell retail products and services that were "excessively priced" and inappropriate for the customers to whom they were being sold, Europe's regulator said last year.

It's worth noting that Danske CEO Borgen makes less than was paid to some traders at major British banks who were subsequently jailed for manipulating Libor. Jay Merchant, a former Barclays trader who was sentenced in July, made £2.2 million (S$3.789 million) in 2007, or about US$100,000 more than Borgen made last year.

Jesper Rangvid, a professor at Copenhagen Business School, says "social fabric" plays a big role. In Denmark, where Danske is the biggest bank, the prevailing mindset that determines pay levels is the demand for a "more equal society with smaller income disparity and less social inequality".

Sweden, Denmark and Norway have also tended to figure at the top of OECD rankings of income equality, and have done so for many years.

John Armour, the Hogan Lovells professor of law and finance at Oxford University, says remuneration policies for bankers still need a lot of work. He argues that, for executives in particular, the benefits of taking risks far outweigh the potential losses, within most prevailing pay structures.

"Some people would say there's no need to touch executive compensation because we've fixed these things and that will align the interests of shareholders with the interests of society," he said.

"That isn't particularly credible."

Mr Armour says regulators need to look into introducing "more liability associated with significant failure. Rather than restricting the upside of pay, we should be focusing on the downside".

Put more simply, that means that, as a bank executive, "if stuff goes wrong, you should have to put your hand in your pocket".

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