Hundreds of City high-flyers could have their remuneration details published – but opposition MPs are critical

Plans to reveal the pay and bonuses of City high flyers in a new voluntary code came under attack from opposition MPs, who said the guidelines would be ignored unless they were enshrined in regulation and policed by the main financial watchdog.

A government-backed review recommended that some of the best-paid bank staff, who are currently shielded from scrutiny, should be included in annual reports as part of a wide range of measures designed to discourage risky behaviour.

The review by former investment bank boss Sir David Walker argued that exposing pay structures for highly paid staff in the City and putting an end to short-term bonuses would help prevent a repeat of the financial crisis.

Bonuses would be delayed for between three and five years and put under scrutiny by a beefed-up remuneration committee. Non-executive directors of finance companies would be required to spend more time assessing deals put forward by executive directors, Walker said.

But the report’s reliance on non-executive directors and shareholders to monitor a voluntary code was branded “inadequate” by Liberal Democrat treasury spokesman Vince Cable, who said banks should be instructed to observe the new rules by the Financial Services Authority.

Cable said: “It is clear that in banks like RBS the demigod status granted to Fred Goodwin prevented any form of credible scrutiny. So the news that bank boards may be forced to show that they can challenge a chief executive is a belated but welcome step in the right direction. But if the Walker approach is to have any value then it has to be obligatory through the FSA and not just on a voluntary basis.”

Sources close to several banks said there was a general acceptance that the Walker rules would be endorsed by the government in time for details of staff pay to appear in next year’s annual reports. According to City sources, one high street bank paid more than 200 staff more than its chief executive. Walker said he wanted the rules to apply to all banks operating in the City, including the largest US banks.

The review will reach chancellor Alistair Darling at a time when several banks have begun setting aside massive bonuses. Goldman Sachs and JP Morgan have reported record profits for the first half of the year.

Several MPs, already concerned at the massive taxpayer funds used to bail out Royal Bank of Scotland and Lloyds Banking Group, have signed an early day motion signalling their concern at the return of huge bonuses at City institutions.

Independent MP Dai Davies sponsored the motion, which urged a rethink at Goldman Sachs. The Wall Street bank could be in a position to offer total pay and bonuses of more than $22bn (£13.3bn), equating to an average payout of $770,000 to each of its 29,400 employees. The motion said it believes “such obscene profits are made by encouraging the very reckless risk-taking that brought down or severely damaged several major banks, and run counter to the restraint urged by the chancellor.”

Goldman, RBS and other banks operating in the UK argue they have overhauled their bonus structures with a greater emphasis on long-term rewards, but continue to face criticism that both the size and structure of their bonuses encourages risky behaviour.

Walker said the pay of individual staff below board level who earn large sums would be revealed in the form of pay bands in the annual report, though names would be kept secret. The remuneration committee would have the power to overrule the board if it believed the level of pay or bonuses encouraged risky behaviour.

He also said the role of non-executive directors should be strengthened to make up for the failures of banks prior to the credit crisis. A risk committee at board level would also oversee the policies of the bank and assess whether they could undermine its strength.

Walker said: “These proposals are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment. If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance.”

His proposals include:

• Board-level risk committees chaired by a non-executive director.

• Risk committees to have power to scrutinise, and if necessary block, big transactions.

• More power for remuneration committees to scrutinise company-wide pay.

• Remuneration committees to oversee pay of highly paid executives not on the board.

• Significant deferred element in bonus schemes for all highly paid executives.

• Increased public disclosure about the pay of such executives.

• Chair of remuneration committee to face re-election if his or her report gets less than 75% approval.

Walker said that while shareholders largely encouraged risk-taking by banks, they would need to take in the future a more active role in restraining banks such activity.

“Failures in governance in banks and other financial institutions made the financial crisis much worse. Many boards inadequately understood the type and scale of risks they were running and failed to hold the executive to high standards of sustainable performance. Bonus schemes contributed to excessive risk-taking by rewarding short-term performance. And shareholders failed to exercise proper stewardship,” he said.

“Taken alongside the arrangements being proposed by the FSA, the recommendations on remuneration are as tough or tougher than anything to be found elsewhere in the world. An important and urgent challenge is to promote adoption of similar approaches internationally.

“These recommendations should bring substantial improvement in the governance of banks. They will not guarantee that failure will be avoided in future but will greatly mitigate the risk.”