G20 Summit September 25, 2009, 9:12PM EST

World Leaders Commit to Rein in Financial Bonuses

The G-20 economic summit ends with a vow to reform pay practices and bank-capital requirements. But getting action back home won't be easy

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The leaders of 20 of the world's biggest economies committed to a laundry list of executive pay reforms for financial firms, including limiting bonuses to a portion of total net revenues and linking them tightly to share prices. But don't count on sweeping mandates from regulators just yet.

Wrapping up a daylong meeting in Pittsburgh, the Group of 20 issued a lengthy statement that, in part, called on member countries and financial firms to end multiyear guaranteed bonuses; pay out "a significant portion" of variable pay over time, tying it to performance and making it vulnerable to forfeit under various conditions; and disclose more information about corporate pay policies.

It also called on member countries to give regulators the ability to review pay at financial firms and impose higher capital requirements or other "corrective measures" where compensation practices increase the risk to a firm or financial system. They should also be able to change pay practices when firms fail or the government must intervene.

But that could prove tough sailing in the U.S., where regulators currently only have real control over the compensation practices of banks, notes Brian Gardner, a financial policy analyst for Keefe, Bruyette & Woods (KBW). Unless new legislation is passed, that leaves out hedge funds, insurance companies, private equity funds, and unregulated lenders—which could begin poaching top employees from banks that are subject to the restrictions, putting the banks at a competitive disadvantage. "It's going to pose some difficult challenges for the banking industry," Gardner says.

Many Goals, Few Enforcement Mechanisms

Much of the rest of the 23-page, densely worded "Leaders Statement" issued by the G-20 reads not so much as the outcome of one meeting but as an ambitious and potentially far-reaching agenda for many years to come.

It is long on deadlines but short on specifics, most of which it leaves to the finance ministers and central bankers of member countries and to global institutions such as the International Monetary Fund and the newly expanded Financial Stability Board. It is also short on enforcement mechanisms, largely leaving compliance in the hands of "name and shame" reports calling out those countries that fail to measure up.

But the world leaders who took part hailed the meeting as a success, calling the proposals significant steps toward vital goals, and the statement itself congratulated the member countries for successfully staving off a more serious financial collapse through their actions since the crisis began last year. Still, they said too many people remain without work and emphasized that the global financial system remains in need of repair.

"There is much more work to be done," President Barack Obama said at a post-summit press conference. "But we leave here today more confident and more united in the common effort of advancing security and prosperity for all of our people."

At its heart, the document focuses on the effort to reform global financial regulation, which also took center stage at the group's pivotal April meeting in London—and in particular, reining in executive compensation at financial firms. It also emphasizes a sweeping new attempt to increase domestic consumption in countries like China and to reduce borrowing in the U.S.

The G-20 leaders also sought to lay the foundation for revamping the governance of the IMF and the World Bank, making progress on climate-change and global energy initiatives, phasing out government subsidies for fossil fuels except for the very poor, forestalling protectionism, and pursuing an international development agenda that has previously been the purview of the richest countries.