Royal Bank of Canada said on Tuesday it is changing the way it compensates its traders and investment bankers, including deferring some pay, in a bid to discourage employees from taking excessive risks.As global regulators mull ways to avoid another financial meltdown, Canada's largest bank said it was adjusting its pay scheme in a bid to avoid high-risk trading or fraud. The changes include a higher stock ownership level for high-level bankers and a clawback provision for misconduct."RBC Capital Markets is introducing a revised compensation plan to strengthen alignment of individual rewards with shareholder interests and to advance our goal of good governance," spokeswoman Stephanie Lu said in an email.
The changes come just days after Finance Minister Jim Flaherty said Canadian regulators were in the process of implementing guidelines on executive bonuses, including deferral of compensation to discourage bankers from making risky deals for short-term profit.While Canadian bank bonuses are not the politically charged issue they are in the United States -- in large part because the banks here did not accept taxpayer bailout money -- Canadian lenders expect regulations will change as global authorities try to prevent further financial calamity.
Under the changes at RBC, a greater proportion of compensation will be deferred, paid out over three years at a percentage determined by the size of the bonus. RBC said a higher percentage of deferred compensation will vest in the third year, with managing directors entitled to receive 50 percent of compensation only in the third year.By comparison, many other banks offer employees deferred compensation earlier, evenly weighted over three years, rather than with the bulk of the pay received after three years.
Canada has been opposed to an absolute cap on bankers' pay but Flaherty has said regulators are working on a three-year model for deferring bonuses. That would result in the possibility that traders could have their bonus revoked if the transaction that was profitable in the short term turned out to be a loss-maker over a longer period.Minimum stock ownership levels will also be introduced for RBC's managing directors, the senior staff who oversee operations on the capital markets side. The directors will be required to own company stock equal in value to a multiple of their base salary, RBC said.That's an attempt to ensure employees care as much about the company's overall value and stability as their pay. "We've introduced a clawback provision for fraud, misconduct or failure to bide by policies and procedures that result in material loss or financial restatement," Lu added. The bank has not changed the way it calculates bonuses, which are based on earnings. The process takes into account charges related to credit losses, liquidity, funding and capital charges, and is also affected by the performance of the bank overall.
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