World Leaders Disagree Over Bonus Culture

World leaders gathering in Pittsburgh for the G-20 summit are expected to consider whether to impose new restrictions on the financial industry's bonus culture. U.S. officials are at odds with other countries over how much of a say regulators should have in determining how much a company pays its executives.

STEVE INSKEEP, host:

There will be much more talk about the economy today as world leaders gather in Pittsburgh. It's a summit of the leaders of the world's 20 largest economies. And one issue they're expected to consider is whether to impose new restrictions on the financial industry's culture of paying big bonuses. American officials say the collapse of the financial sector last year was at least partly due to compensation practices that encourage banks to engage in risky practices. As NPR's Jim Zarroli reports, the U.S. is at odds with other countries about what steps to take.

JIM ZARROLI: There's a kind of bipartisan rage being directed at the world's biggest financial companies right now. On talk radio, conservatives rail against the federal government bailout, furious that taxpayers have been forced to prop up bankers who took irresponsible risks. Meanwhile on Wall Street this week, AFL-CIO head Rich Trumka led a protest demanding stricter regulation of banks.

Mr. RICH TRUMKA (President, AFL-CIO): We have a message for Congress. We're asking them which side are you on. Either you're with us or you're against us.

ZARROLI: The anger has mushroomed this summer following reports of more huge payouts for executives of big financial institutions, including some that received bailout money. And Paul DeNicola, who studies corporate governance at the Conference Board, says banks are having to respond.

Mr. PAUL DENICOLA (Associate director, Conference Board): Boards are facing increasing pressure, be it from their institutional shareholders or also from a public outcry to rein in executive compensation to a reasonable level.

ZARROLI: In recent weeks, the Federal Reserve has taken up the cause. It's expected to release new regulations on executive pay within a few weeks. One change nearly everyone agrees on is a ban on compensation plans that encourage traders and brokers to engage in risky behavior.

Scott Talbott of the Financial Services Roundtable says one example is what are called yield spread premiums.

Mr. SCOTT TALBOTT (Senior Vice President for Government Affairs, Financial Services Roundtable): It was a compensation practice where the mortgage broker received a bonus if he sold a mortgage at an interest rate higher than the borrower would've otherwise qualified for. Well, that type of practice has stopped and did not benefit anybody except the mortgage broker.

ZARROLI: But Talbot, whose organization lobbies on behalf of financial companies, opposes some of the other ideas now coming out of Washington. The House passed a bill this summer that would give regulators a lot more power to determine executive salaries. Meanwhile, because most big banks tend to operate globally, foreign governments are also weighing in.

France and Germany have proposed strict caps on bankers' salaries. Talbot says that would be a huge mistake. He says it would mean banks would have to throw out the incentive-based compensation plans that help them compete. He also says draconian measures aren't necessary, because after the crisis of the past year most banks have become a lot more cautious anyway.

Mr. TALBOTT: The threat of failure and the ghost of the institutions that have failed are threat enough for the institutions to change their practices to ensure that they stay in business, that their customers receive good products and their employees are compensated well.

ZARROLI: But others are skeptical. J Robert Brown of the University of Denver Law School says big banks might be acting responsibly now, but once the economy turns around they will revert to their old practices. As for the Obama administration, it has been so far been cool to some of the more aggressive proposals like the pay caps favored by some Europeans. But Brown thinks that may change. He says there's a growing sense that not much has been accomplished in the year since the financial crisis.

Professor J ROBERT BROWN (University of Denver Law School): And I think for this administration they need to fix something to say we took some step to prevent this from happening again, and the most obvious step to take is to say we are not going to allow for the kind of compensation practices that may have caused this crisis to begin with.

ZARROLI: U.S officials are expected to release details of their compensation proposals over the next few weeks. And Brown says that will give them a chance to take a stand on a politically contentious issue and show that they are ready to reform a system and that wreaked so much havoc last year.

Jim Zarroli, NPR News.

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