Lawmakers Against Greed

Civil servants may be required to continuously educate ourselves

According to the agency RIA Novosti this initiative was proposed by the Ministry of Labor. Dmitry Akopov, CEO of Jacobson Partners discussed this with Kommersant FM anchor Oksana Barykina. |  June 10, 2015

Transitional period

One of the most important indicators of the economy is the demand for automotive products. According to experts, by September car sales in Russia fell by 12.7% in the first eight months of the year. Hard times came both for the automakers and related sectors related to the automobile industry. Under these conditions, the larger the company the harder it is to change for it in a short time. Experts point out that many companies are focused on improving the efficiency of the management. Active changes are taking place at AvtoVAZ, the largest automaker not only in Russia but also in Europe. Its production is the best-selling in Russia: about 250,000 cars were sold within eight months of this year, accounting for about 17% market share in Russia. Sales of Renault over the same period were half less. |  October 02, 2014

Investment Profit

Forestry enterprises face a difficult situation. On the one hand, the Soviet-era model of forest management requires extensive investments in the development of new territories. On the other hand, it is necessary to change the obsolete equipment and introduce foreign technologies. In addition, electricity tariffs are going up and services of competent professionals are expensive. We need to change the system, but not to cut costs, experts say. |  March 25, 2014 |  December 04, 2013

Lawmakers Against Greed

Last month, the Government submitted to the State Duma a bill on limiting severance payments. Dmitry Akopov, CEO of consulting company Jacobson Partners, believes that it was right that Russia joined the European campaign against high severance payments for terminated top-managers.

Severance payment, or as it is called in the West, golden parachute is not a mechanism of motivation for employees to achieve results, but a kind of compensation for early termination of employment by the employer. Banks use various instruments to reward and motivate their managers in order to raise efficiency of the company and increase their loyalty. First of all it is the variable component of remuneration such as bonuses and awards, which are used as a short-term and medium-term mechanism oriented on individual performance and achievement of strategic goals. According to the recruitment consulting company Jacobson Partners, the size of the bonus varies from 25% to 200% of annual salary. An average bonus size is 100%. There are also long-term mechanisms to attract and retain management and directly tie their interest to the company performance — those are called optional programs. Today optional plans are carried out in two variants: real and virtual.

Abroad, after the crisis, major financial institutions stopped paying their employees bonuses in cash but now they give them stock options with deferment provided that there will be no payments if the employee causes damage or leaves the company. In Russia, this practice is still not widespread. Alfa Bank pays part of remuneration in phantom shares. Since 2012, there is an option plan in Financial Corporation Otkritie. Gazprombank also uses an option plan: in 2012 Board members and other members of senior and middle management were paid bonuses in the form of stock options. Bank employees may sell their shares two years after receiving them. There is an option plan in VTB Capital: part of the bonus is paid to all employees in VTB shares depending on the performance.

There is a complicated situation with option plans in Sberbank and VTB. Sberbank was thinking about implementing the program in 2007, and VTB in 2009. At the end of 2010, it seemed that the plan for both two state-owned banks is almost approved by the Central Bank and the Ministry of Finance, but the process stalled because of disagreements with Sergei Ignatiev, who was the then Head of the Central Bank. Today, VTB is not ready to disclose details of the stock option plans, although previously Andrey Kostin, Head of Central Bank and Herbert Moos, Deputy Chairman of Central Bank were saying that shares for the stock option plan will be purchased from the market. Perhaps employees will not be able to sell them within 3 years, which should encourage management to work towards the growth of the bank's capitalization. The total volume of the stock option plan was previously estimated as 1% of the shares, and several hundred top managers could join the plan. Despite the fact that the documents were agreed with the Government, neither Sberbank, nor VTB can approve their bonus programs with the Central Bank.

The remuneration of senior managers is often the subject of heated debate about the fairness of its form and sizes, and sometimes a source of external corporate conflicts. Over the past few years, we have seen an active intervention of national regulators in developed countries in remuneration of financial organizations. Many analysts consider the vicious practice of remuneration of top management of banks aimed at short-term results as one of the causes of the crisis in the global financial system. Also, the banking sector is one of the areas where bonuses and compensations have always been high.

In early November, the government submitted to the State Duma a bill on limiting the size of the severance where the minimum severance is offered to be limited to three, maximum six monthly salaries. It's hard to say how effective this tool can be. Almost none of state-owned companies disclose the level of remuneration of their top managers: in their statements they show that they received payments based on bonuses, which could hinder the control over the size of golden parachutes. It can be assumed that, if necessary, the initially agreed parachute can be compensated by some other payments, such as bonuses or additional premiums provided by the remuneration system adopted in the company.

According to our experts, the planned measures will affect only a portion of those big payments to top managers as part of their remuneration programs. Be as it may, the potential tightening of control over compensations will not be able to reduce the number of people willing to work in state-owned companies.

However, there is a sufficient number of commercial banks in the Russian market, which are unlikely to be affected by a potential restriction. According to Jacobson Partners, golden parachutes have always been a traditional part of the compensation package in the banking sector. This is primarily due to the fact that the bank's image and reputation mean a lot for the market. That is why this tool is used to offset potential risks and conflicts for top managers if they have to leave.

So far in Russia, the commercial banking sector has avoided public scandals because of the overinflated payments to managers and as a rule compensations fall within the manager's yearly income. Most of the payments exceeding this size may also include a bonus to be paid under the current remuneration system adopted in the company. The Central Bank believes that bonuses to managers of systemically important banks must depend on the dynamics of their shares, and the remuneration system should be long-term with an option to adjust in case the bank's performance deteriorates. Also, from July 1, the Central Bank was planning to firmly peg the salary and bonuses of employees to the economic situation of the banks.

Improvement of systems of remuneration of staff and executives in the banking sector has been and remains the prerogative of their owners and their authorized top managers. Regulatory authorities only define general requirements for remuneration subject to the limitation of accepted risk and the need to maintain the competitiveness of the banking sector.

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