Russia's VTB Capital to Revamp Pay, Eyes Expansion
BY PAUL HANNON (The Wall Street Journal)
LONDON–VTB Capital will become the first financial institution from Russia to introduce a pay structure that complies with new international standards designed to reduce bankers' focus on short-term profits and eliminate excessive risk taking.
The move, which the firm intends to announce to its staff on Thursday, comes at a time when the investment-banking arm of VTB Bank, second only to Sberbank among Russian lenders, sees a rare opportunity to expand rapidly and gain critical mass, with many western European rivals in retreat as a result of the euro zone's fiscal crisis.
In an interview, Yuri Soloviev, the head of VTB Capital, said the new incentive structure was needed not just to meet the requirements of the U.K.'s Financial Services Authority and regulators in other financial centers into which the bank is expanding, but also to control risks at a time of rapid change.
"We're growing extremely fast," said Mr. Soloviev, who moved to VTB from Deutsche Bank Russia in 2008. "For us, this growth has to be controlled from a risk-taking perspective. We have been criticized in the past for taking too much risk, and this should help us be much more cautious."
VTB Bank is majority-owned by the Russian government. Russian Prime Minister Vladimir Putin last week unveiled a surprise proposal to buy retail investors out of a disastrous 2007 initial public offering of VTB at the offering price.
Mr. Putin is running for president. The vote is scheduled for early March.
Mr. Soloviev said the decision to launch a new pay system for VTB's investment bankers "is by no means related to politics," but is designed to align the interests of employees with those of shareholders.
"Russia's political leadership has spoken about this issue so I'm sure we will see more Russian companies implementing similar plans," Mr. Soloviev said. "However, VTB Capital's implementation [of the incentive plan] is in line with requirements and recommendations of the FSA and other regulators around the world and is not determined by anyone's political agenda."
Under the new plan, a portion of bankers' pay will be awarded in the form of shares in VTB in equal parts over three successive years. VTB said the right to receive those shares will depend on "the contributed quality and effectiveness of the work performed by a particular employee."
"If the person leaves the firm, or does various things that lead to a deterioration of the firm's performance, then the remuneration committee has the right to stop the vesting process," Mr. Soloviev said.
Indeed, VTB may be a good test of whether the international standards for pay work. They are intended to prevent a return of the voracious appetite for risk that accompanied rapid credit expansions in the run up to the 2008 financial crisis.
Most of the western European and U.S. banks that have so far adopted the standards are unlikely to be eager to lend, or take on large amounts of risk, any time soon. By contrast, the financial crisis has presented VTB Capital with an opportunity to gain business and hire staff.
"It started in Russia," said Mr. Soloviev. "In 2008 and 2009, lots of foreign competitors pulled out. A lot reduced their business in Russia. That presented us with two opportunities. We were able to find the best people, and the business space became much less saturated."
And as the financial crisis has been followed by a sovereign-debt crisis in the euro zone, new opportunities opened up, driven in part by what Mr. Soloviev describes as "fantastic labor-market opportunities."
Among its senior hires last year was Atanas Bostandjiev, who is now VTB Capital's chief executive officer for the U.K. and international operations. As a partner at Goldman Sachs Group Inc., he was responsible for the bank's emerging-market client business in central and eastern Europe, the Middle East and Africa.
One region in which VTB sees room for expansion is central and eastern Europe.
Banking systems in many of those countries are dominated by the subsidiaries of western European banks. But those lenders are having difficulty raising funds to pass on to their subsidiaries to the east, partly because of uncertainty about how much they will suffer as a result of the euro zone's crisis.
"A lot of our global competition is getting out of peripheral countries," said Mr. Soloviev. "No other global bank has the ambition of doing anything in central and eastern Europe right now."