French bankers bid 'adieu' to guaranteed bonuses

• By Peter Gumbel, Fortune Europe editor
• On 1:37 pm EST, Thursday November 5, 2009

Banks in France, including non-French ones, will no longer be allowed to offer guaranteed bonuses to traders and other staff under new rules announced Nov. 5. The only exception is for signing bonuses for new employees, and they are limited to a maximum of one year.

Among other stipulations in the government decree, which takes effect immediately: Bonus payouts will be spread over at least three years, and will be clawed back either in part or entirely if the transactions on which the bonus was calculated turn out to be less profitable than thought at the time of the award. For large bonuses, at least 60% of the total must be deferred. And, for all variable bonuses, at least half of the total must be in stock rather than cash.

The French government says it's pioneering a tougher system of bonus awards that reflect the spirit and letter of a deal struck at the recent G20 meeting in Pittsburgh. Finance Minister Christine Lagarde says she expects other countries to follow suit with their own set of similarly restrictive rules.

The French regulations were put together with input from the national bankers' federation, which has been regularly cajoled over the past year by President Nicolas Sarkozy to end what he's called "scandalous" bonus payments.

The new rules were announced jointly by Lagarde and Baudoin Prot, the head of the federation and chief executive of BNP Paribas, the top French bank. Prot didn't mention Sarkozy's browbeating, but said that France is acting as a result of lessons learned from the financial crisis.

Privately, some top French bankers are concerned that they'll lose some of their best staff and have difficulty recruiting talented international executives under the new restrictions.

Prot said he was "very concerned" that other countries implement similar rules, singling out the U.S. and Britain. "It's an important test of credibility" for the G20 that others follow suit and create a level playing field, he said.

How likely is that? Banks everywhere are under fire over bonuses, and regulators are stepping up pressure. U.S. Treasury Secretary Timothy Geithner recently described huge payouts to executives at companies that were only a few months ago on the brink of failure as "deeply offensive" to the public.

In Britain, Adair Turner, the top regulator, is pushing banks to use profits from the recent market bounce to boost reserves rather than make big, and politically unpalatable, payouts to staff. In Germany, the government is also pushing for restraint.

But market pressure is market pressure, and not every country is as willing or as quick to regulate as France.

The new rules probably won't reduce the public controversy over bonuses in France, either. That's because, starting with this year's payouts, banks have a new obligation to disclose the total size of the pot, the number of beneficiaries, and the division between fixed and variable payments. In other words, plenty of fodder for the critics.

Buzz up!