DAVOS, Switzerland (Reuters) - Top executives meeting in Davos say the bonus culture that drove financial investments on Wall Street faces a major overhaul as bankers humbled by the financial crisis prepare to curb excessive pay.
U.S. President Barack Obama on Thursday voiced outrage at lavish pay checks after the New York comptroller revealed that a staggering $18.4 billion of bonuses payout were made in 2008.
In Europe, banks that have had to go cap in hand to governments for state help are also under pressure to change the way they compensate managers and introduce disincentives to take too much risk.
"It is quite clear that at least some of the compensation models at these firms have to be not just incrementally changed but completely overhauled," NYSE Euronext Inc. Chief Executive Duncan Niederhauer said on Thursday, on the sidelines of the World Economic Forum.
Senior executives say the drive toward the end-year bonuses has pushed some bankers to take increasingly high risks in the hope of getting the high profit that would yield a marked top-up to their basic pay at the end of the year.
"Increasingly (the focus) is moving away from the short into periods of time of three to plus years," Mark Tucker, chief executive of insurer Prudential, told Reuters.
The short-term approach can be eliminated, executives said, by introducing a mechanism that allow banks to spread bonuses over a number of years and potentially claw back money.
"You are going to see a move where the overwhelming majority of those individuals is paid in deferred stocks or other deferred methods," Niederauer said.
"It gives the company the ability to have a claw back mechanism that does not exist today."
Banks across the world have started to cut down on executive pay, and bonuses in Wall Street were down on average 44 percent from the year before. But now the focus is on shifting to create permanent disincentives within the payment system.
"People who had a major and instrumental role in bringing to this crisis seem to be walking away without too much pain," said Philip Thorpe, chief executive of the Qatar Financial Center Regulatory Authority.
"Going forward, we need a regulatory structure which creates sufficient disincentives - an old carrot and stick approach."
Swiss bank UBS, which agreed to change its compensation system when it received a Swiss government bailout in October, has already introduced a system whereby variable pay is locked over a number of years and can be raised or cut back depending on effective performance.
The bank axed its top managers' bonuses for the year and slashed those for its investment bank by more than 80 percent.
Credit Suisse, which already has a claw-back system in place, announced in December it would pay some senior executives with illiquid assets, forcing them to take on some of the risk that had been put on the bank's books.
Some banks are mulling the introduction of a "say on pay" system for shareholders so as to give them more control.
Executives stressed, however, that incentives were not always a bad thing, and they tended to differentiate between Wall Street banks and other segments of the financial services industry.
"We are a consulting group, effectively, so bonuses have always been an appropriate part of what we do," Brian Duperreault, president and chief executive of insurance broker Marsh & McLennan Cos Inc told Reuters.
"The Wall Street world and our world are different."
"Were they really making the kind of money they supposedly were making? It turns out no. If no value is being created then there shouldn't be any compensation at all," he added.
Editing by Simon Jessop