Penalties & Pay: Financial Responsibility

The position of a non-executive director for a bank is part-time, yet is paid more than five times the national average full-time wage. This discrepancy is so-called ‘danger money’- a rise in pay as a result of reforms that can allow bankers to be held accountable for mistakes. These penalties go so far as jailing executives, though the Prudential Regulation Authority (PRA) has stated that such actions should be rare.

The Senior Manager’s Regime, as it is called, introduced a number of changes to accountability and banking culture in early 2015. This included redefining which positions are included as Senior Management and are therefore as responsible as executives in decision-making.

Given these new regulations, many executives are worried about liability. Despite the PRA’s assurances that bank failures are ‘likely to be rare’ due to the tightening up of regulations, many have been scared off. Even at five times the national wage, the risk of ruin can be considered too high.

The High Pay Centre (HPC), a non-party think tank dedicated to monitoring income distribution, published a report in May 2015 calling for even more reform- but now, of Long-Term Incentive Plans. LTIPs are a form of compensation among executives based on performance shares. The HPC presented evidence in their report of an increase of 250 percent in LTIP payments to FTSE directors between 2000 and 2013 but without a corresponding increase in return to shareholders.

In a recent survey, 52 percent of Institute of Directors members stated that the largest threat to public trust in business was excessive executive pay. The HPC argues that LTIP payments have only made pay packages for executives larger and more complex, rather than encouraging executives to work effectively. Aside from reforming LTIPs, the HPC also argues in favor of paying bonuses in cash rather than shares. Other reforms include removing ‘golden hello’ payments and diversifying remuneration committees.

In April 2015, when the Pension Freedoms Act came into being, the Just Retirements annuities sales group took a 22 percent fall in sales. The Act enabled the avoidance of buying annuities, which serve as Just Retirements’ main source of income. However, one expert says that this is not the end of annuities. Ned Cazalet has speculated that annuities may act as insurance policies in the future given the increase of life expectancy of the average citizen.

As ever, education and awareness of current financial events remains the best way to make informed decisions about the future and get involved in steering the direction of the current financial environment.

 

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