Ismaila Yusuf Federal University Dutsin-Ma, Nigeria Executive Compensation in Nigerian Banks: Regulations or Just More Disclosures? Ismaila Yusuf Federal University Dutsin-Ma, Nigeria Third International Conference on Emerging Research Paradigms in Business and Social Science, Dubai 24-26 Nov. 2015

Outline Overview Principles of Executive Compensation Regulations Executive Compensation Regulations in other countries Executive compensation regulations for banks in US Executive compensation regulations for banks in EU Executive compensation regulations for bans in BRICS Executive Compensation Regulations for Banks in Nigeria Comparative analysis of Compensation Regulations in Nigeria and other countries Conclusion and Recommendation

Overview Researchers have argued that weak corporate governance has been the motivating factors for executive to take excessive risk to maximise their compensation. Some believed weak corporate governance code designed by regulators gave the executive leeway to manipulate the system.

Overview (cont’d) In response to this challenge, many countries both advanced and developing have made changes to either their corporate governance code or restrict executive compensation to discourage excessive risk taking (Financial Times 2008) while some have adopted both. The paper provides discussions on executive compensation regulation in banks by highlighting some of the notable executive compensation regulation in some developed and developing economy viz-a-viz what is obtainable in Nigeria.

Principles of Executive Compensation Regulations In a bid to forestall future occurrence of the global financial crisis caused by excessive risk taking motivated by excessive rent taking through executive compensation, executive compensation in financial institutions have been regulated. These regulations involves; Risk and Executive compensation Claw Back Policy Severance Pay Shareholders’ say on Executive Compensation

Executive Compensation Regulations for Banks in US Troubled Assets Relief Program (TARP) Executive Compensation Regulations (American Recovery and Reinvestment Act of 2009) Requirements for banks who received TARP funds Joint Regulatory Guidance on Incentive Compensation (2009) Dodd-Frank Section 956: Interagency Rule on Incentive-Based Compensation Arrangements (2011)

Executive Compensation Regulations for Banks in European Union Capital Requirements Directive IV (CRD IV) which provides Caps ratio of variable to fixed compensation at 1:1 Bonus-malus and clawback clauses which must apply to 100 percent of variable compensation Deferment of up to 40% of executive bonus Bans hedging strategies or insurance contracts that would undermine the risk-alignment effects of the remuneration package. Requires complete and detailed disclosure of remuneration practices for large and complex firms.

Executive Compensation Regulations for Banks in BRICS Countries Brazil Regulated under the Ordinance No 3,921 of the National Monetary Council of the Brazilian Central Bank (the ‘Central Bank Ordinance’) enacted 2010. Includes the following Compensation policy must be compatible with risk management policy of the institution. Variable pay should be based on current and potential risks and the overall result of institution. At least 50% (fifty percent) of the variable compensation must be paid in shares or share-based instruments, which must be at fair value At least 40% (forty percent) of the variable remuneration should be deferred for future payment, the deferred period must be at least three years

Executive Compensation Regulations for Banks in BRICS Countries (contd) Russia Regulated by the Central Bank of Russia Corporate Governance Code 2014. Which provides that; Executive remuneration should ensure reasonable and justified ratio between its fixed portion and its variable portion, which should be based on performance and individual executive contribution thereof. Quoted companies should have a long-term incentive programme its executives and other key managers involving the company's shares Severance Package should not exceed two times the fixed portion of an executive’s annual remuneration. Where variable pay is significant, a long-term incentive programme should account for at least 50% of the target amount There should be deferred payment of a bonus upon the results of a year, where such bonus will be paid for example, in equal instalments over the next three years.  

Executive Compensation Regulations for Banks in BRICS Countries (contd) India Regulated by Reserve Bank of India notification of 13 January 2012. It provides that; The variable pay of WTDs and CEOs should not exceed 70% of fixed pay in any one year. Guaranteed bonuses must not form part of the compensation plan Where variable pay is significant, an appropriate portion of the variable pay (e.g. 40% to 60%) must be deferred for a period of not less than three years. Where deferral arrangements are made in any line of business in any year, the deferral compensation should be made subject to claw back

Executive Compensation Regulations for Banks in BRICS Countries (contd) China Governed by Supervisory Guidelines on Compensation Practices of Commercial Banks 2010. Provides that; Compensation payout schedules of a commercial bank shall be aligned with the time horizon of risks of relevant business lines. The medium and long-term incentives shall be paid after the lock-up period prescribed in the employment contract expires. Executives and senior officers of banks should have at least40% of their performance-linked compensation payable under deferral arrangements over a period of no less than three years. A commercial bank shall establish claw back arrangements for the payouts of performance-linked compensation.

Executive Compensation Regulations for Banks in BRICS Countries (contd) South Africa Governed by Code of Corporate Governance King III, provides; There should be a balance between the fixed components and the bonus component of total remuneration of executives so as to allow for a fully flexible bonus scheme. Yearly bonuses should clearly relate to performance against yearly objectives consistent with long-term value for shareholders. For bonuses, there should be a contractual link between variable pay and performance. All share-based incentives, should align the interests of executives with those of shareholders and should link reward to performance over the longer term.

Executive Compensation Regulations for Banks in Nigeria Governed by 2014 CBN Code of Corporate Governance for Banks and Discount Houses. Which provides that; Executive compensation should align with the long term interests of the bank and its shareholders Should be sufficient to attract, retain and motivate executive officers Should be balanced against the bank’s interest in not paying excessive compensation Where compensation is linked to performance, it should be done in such a way as to prevent excessive risk taking. Remuneration policy put in place by Board of Directors should be disclosed to the shareholders in annual report Share options be tied to performance and subject to the approval of the shareholders at Annual General Meetings.

Comparative Analysis of Compensation Regulations in Nigeria and other countries IIF (2013) highlighted the main objective of compensation regulations for banks as below; Ensuring independent and effective oversight of compensation policies and practices. Linking compensation to the firm’s financial condition and future prospects. Ensuring compensation does not limit an institution’s ability to strengthen its capital base. Making the size and allocation of the variable compensation pool take into account the full range of current and potential risks. Increasing the usage of deferral, vesting and claw back/malus arrangements to better align long-term incentives. Limiting guaranteed bonuses. Enhancing public disclosure and the transparency of compensation.

Design objectives of Executive Compensation Regulations Among countries Source: Author’s analysis based on Executive Compensation Regulations in the above countries.

Design objectives of Executive Compensation Regulations Among countries Nigeria records about 57% compliance with the design objectives of executive compensation regulations in banks. This result is a significant deviation from global best practice in executive compensation regulations in banks. The Nigerian regulations as contained in its code basically address the issue of disclosure and left regulation of the pay structures to the discretion of the board.

Conclusion The CBN code of corporate governance which deals with executive compensation of banks in Nigeria has however failed to meet the global best practice in the design of executive compensation regulations. It has however limited it regulations to disclosure and have left the regulation of structure of pay which has been the main issue necessitating the call for the regulations of executive compensation especially in financial institutions. This has put the effectiveness of the CBN code of corporate governance in question, as the test of whether companies have effective corporate governance has, rightly or wrongly, become increasingly related to judgments about remuneration issues (OECD 2009).

Recommendation It is important for the CBN to look critically into the issue of remuneration of bank executive to ensure strict regulation, as weak corporate governance can lead to bank failures as well as financial crisis where the four broad areas of risk governance, remuneration and alignment of incentive structures, board independence, qualifications, and composition as well as shareholder engagement are not properly articulated (Ard and Berg 2010).