Bonuses Become a Wedge Issue in the G-20

Bankers’ pay has become one of the most divisive issues among G-20 members as they prepare for September’s summits on the world’s financial system.

U.K. Chancellor Alistair Darling earlier this month pledged to put bankers’ pay on the agenda of the finance ministers meeting in London on Sept. 4, claiming an international approach was needed to crack down on excessive pay in the financial sector. But it would appear European leaders may not be reading from the same script, with some pressing for tougher reforms.

Even before Tuesday’s deal with banks, the French government was saying the U.K.’s code on remuneration published earlier this month didn’t go far enough and wasn’t appropriate as a global agreement. In particular, it objected to the U.K.’s Financial Services Authority decision to use guidelines, rather than specific rules, to shape banks’ pay practices.

“The problem with guidelines is that you apply them when it suits you,” a spokesman for France’s finance minister, Christine Lagarde, said Tuesday. He added that there were very strong lobbying movements in the U.S. and the U.K. that had the potential to derail reform on pay. “We want to make sure everyone is playing by the rules, because if not, there is no point in having the rules,” he said.

Germany has mostly agreed with France at G-20 meetings, although according to a spokesman for the German government, German Chancellor Angela Merkel hasn’t yet formed a clear position on pay rules for the Pittsburgh summit, which officially starts Sept. 24. Ms. Merkel has to balance her position for the main G-20 summit in Pittsburgh with the general election that follows soon after on Sept. 27.

But Ms. Merkel has allied herself with French President Nicolas Sarkozy before. Prior to the London summit, she held a joint press conference with Mr. Sarkozy urging the G-20 to place more emphasis on financial regulation than stimulus spending. Mr. Sarkozy said at the time that Germany and France “will speak with one and the same voice.” Asked if Germany could again unite with France at September’s summit, a spokesman for the German government said: “Yes, I think so.”

European leaders might get a chance to iron out their differences at a meeting in Stockholm proposed by Swedish Prime Minister Fredrik Reinfeldt in July in his capacity as the holder of the European Union presidency. Mr. Sarkozy has expressed support for the idea, while a spokesman for the German government said he expected it to go ahead, although Mr. Reinfeldt said Tuesday it isn’t certain the meeting will take place.

G-20 members seem to agree that pay should have extra limitation at companies that have received state aid. The U.S. had restrictions in place on the pay practices of banks that received money through the Troubled Asset Relief Program, though a number of banks, including J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., have repaid the money and are no longer subject to them.

In Russia, Finance Minister Alexey Kudrin has urged executives of banks and state-run companies to reduce bonus payments for the duration of the crisis. Representatives of Russian ministry of finance didn’t return calls for comment ahead of the G-20 summit.

In Australia, a row over pay caps meant that the government’s proposed commercial-property bailout fund was voted down in the senate. In June, the four billion Australian dollar ($3.3 billion) fund was aborted after Australian Prime Minister Kevin Rudd’s government refused demands to put a A$1 million cap on the salary of banking and property executives whose companies would have benefited from the project.

“Executive remuneration is clearly an important issue in terms of financial sector reform and we look forward to ongoing constructive discussions on this matter,” said a spokesman for Australian Treasurer Wayne Swann.

In Canada, a spokesman for the department of finance only said that the country “supports the statement from the G-20 leaders’ summit in London last April.” The G-20 countries agreed to pursue the compensation principles established by the Financial Stability Board. Those principles called for more effective oversight of a financial institution’s compensation practices by board of directors, a better alignment of compensation with risk, and clear disclosure of compensation practices to stakeholders, among other items.

A spokesman for Italian market regulator Consob said that neither the body nor the Italian Government had outlined a position on the oversight of bank pay. However, the spokesman said Consob may be willing to intervene in the future to regulate the matter.