FSC mulls new rule to fix banks’ short-term performance culture

Kim So-young, vice chairman of the Financial Services Commission, speaks during a task force on improving management practices at banks attended by experts from both the private and public sectors on April 19. [Photo provided by FSC]

South Korea’s top financial regulator is considering a new plan to mitigate the short-term performance-focused culture prevalent in the country’s major banks, which would involve reviewing executive compensation packages and potentially deferring up to 50 percent of bonuses over the next five years.

The plan was discussed during a task force meeting on improving management practices at banks attended by experts from both the private and public sectors on Wednesday. The meeting was led by Kim So-young, vice chairman of the Financial Services Commission.

The attendees discussed the possibility of changing the system for paying compensation in a way that reflects long-term performance rather than short-term results and that adjusts the deferred bonuses over time if the company suffers losses, Byun Je-ho, the financial policy department head at the FSC, said in a press briefing on Thursday.

The plan would apply to financial institutions with assets of more than 5 trillion won ($3.77 billion) as well as banks and financial holding companies subject to the Financial Corporate Governance Act.

The FSC is considering raising the minimum deferral ratio for performance-based compensation to 50 percent from 40 percent and increasing the deferral period to five years from three years.

Performance-based compensation is often paid out in a lump sum and paid once, it is legally impossible to recover it in legal disputes even if a company subsequently incurs losses. Under the new system, the incentive for short-term pay-for-performance can be further reduced by deferring performance-based compensation and then adjusting the deferred compensation if losses or expenses are incurred. It will also allow deferred compensation payments to be pushed back in the event of a potential loss.