Last week, Obama Administration pay czar Kenneth Feinberg demanded significant executive compensation reductions at seven firms that were rescued by the Troubled Assets Relief Program (TARP). Mr. Feinberg then went a step further, voicing his desire to see the pay cuts extend across much of the financial services industry. The question now before banks is simple: Do they want to be seen as leaders of reform on this marquee issue, or as pawns in a game others are playing?

 

Over the last 18 months, we’ve heard quite a bit about the outdated risk/reward structures that permeated the financial services industry in the years leading up to the current economic crisis. For far too long, critics say, the pay that bankers took home simply didn’t align with performance. When the consequences of their actions resulted in the worst economic downturn since the Great Depression, most escaped relatively unscathed while investors (and eventually taxpayers) were left to pay the bill.

 

Now, no issue is stoking investor and consumer fury quite like executive compensation. But for the companies that may soon find themselves in the eye of the storm, a template for calming the waters has emerged across the pond.

 

Five UK banks – Barclays PLC, Standard Chartered PLC, Lloyds Banking Group, Royal Bank of Scotland, and HSBC Holdings PLC – have announced that they will adhere to strict new bonus rules outlined in a non-binding remuneration code issued by the UK’s Financial Services Authority. The code calls for greater transparency, deferral of payments, and clawbacks as vital elements of strong risk management. Though the banks were by no means obligated to adopt the new rules, they have done so anyway – and sent a powerful message to the marketplace that they are committed to not repeating past mistakes.

 

Now, these banks – along with other companies such as Microsoft, which has adopted a “say on pay” provision, and Goldman Sachs, which has long advocated curbs in executive pay – have set the reputational standard that all of their competitors must meet.

 

At a time when investors, consumers, regulators, and media are looking for answers in the form action, these banks have not only assumed a leadership position on an issue of increasing importance to audiences that run the gamut; they have  provided an actionable example for firms that will face future criticism of their pay policies.