Banks should disclose far more details about their highest paid employees and strict rules should be imposed to defer bonus payouts for at least three years, under a package of measures to improve the banks' management proposed by Sir David Walker.

The proposals stop short of calling for banks to disclose the identities of their best-paid staff who are not on the board. But Sir David says that for "high-end" employees whose pay is greater than the median compensation of the board's executive directors, banks should publish bands of pay above the median, saying how many employees fall into each category and giving a breakdown of salary, bonus, long-term awards and pension.

Sir David's 140-page initial report on how to improve banks’ governance also lays out radical new rules on bonuses, including a stipulation that at least half of a long-term award should be deferred, subjected to further performance criteria and then divided between a three-year and five-year payment.

Executive board members whose pay is above the median should maintain a shareholding equal to their total historic compensation and be discouraged from accelerating a sale of their stake when they leave apart from on compassionate grounds. Any improvement to their pension should also be published, Sir David says.

The proposals on pay are “as tough or tougher than anything to be found anywhere in the world,” Sir David says.

Sir David, who was previously international chairman of Morgan Stanley and a director of the Bank of England, was asked by the Treasury in February to review banks’ boards and pay policies in the wake of anger at bankers over the financial system’s crisis and taxpayer bailouts of banks.

Sir David's final report will be published in November, but his initial findings focus on remuneration and risk, after the widespread belief that in both areas banks became wildly out of control in the past decade, leading to their implosion over the past two years. Sir David also calls for a far greater role for non-executive directors and large shareholders to oversee companies and challenge them about their strategy.

The report aims to be a comprehensive plan to end the practices of the past ten years, where bankers were incentivised to take excessive risks by being paid massive bonuses, which were based on short-term criteria.

Many of the proposals are in answer to the failures of Royal Bank of Scotland, where Sir Fred Goodwin, the former chief executive, is seen to have had too dominant a position on the board, ignoring concerns raised internally and by shareholders, and where bankers were encouraged to take a huge amount of risk through a pay structure that paid them bonuses worth 100 per cent of their salary.

Commenting on the report, Gordon Brown said: "He makes some very clear recommendations which I believe will be adopted.

“The combination of Walker, and what he’s recommending, and what the FSA is prepared to do I think fundamentally changes the environment in which bonus payments are made.”

The Prime Minister said: “There have been excesses, it is seen by the public as irresponsible and unfair, we have got to take the action.”

Sir David calls for radical changes to the remit of the remuneration committee, so that it can have a say over the compensation of the highest paid individuals who are not on the board.

The move would mark a significant departure from the practice of many banks, where decisions on how to compensate star employees are left up to executive management. There is also very little public disclosure about pay of anyone not on the board.

Non-executive directors of banks should spend up to 50 per cent more time on their roles and should face a much more rigorous vetting process by the Financial Services Authority, Sir David says.

“These proposals are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment. If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance,” Sir David said.

The report, published today, calls for a far greater role for risk committees in banks, including giving them the power to block big transactions.

Sir David stopped short of calling for the chief risk officer to have a board seat following resistance to the idea from some banks. But he says that the risk committee should be chaired by a non-executive director, and proposes that the chief risk officer should report directly both to the chief executive and to the board risk committee.

The move would be a significant change for some banks which do not have board level risk committees and rely on their audit committees to monitor risk.

His other major area of focus is on the role of large shareholders, which must be much more active in their engagement with companies, Sir David says.

That should include large shareholders agreeing a “memorandum of understanding” on how to act together if they have a dispute with a company.

The initiative would set out who will take the lead and how conflicts of interest should be dealt with.

The idea is in response to complaints from large shareholders that they were unable to act effectively to rein in banks because they felt they could not co-ordinate their actions because of the restrictions imposed by the Takeover Panel’s rules about concert parties.

Sir David considered calling for a “standing secretariat” made up of large institutional investors to deal with bust-ups with companies, but the idea met strong resistance in the City on the grounds that it was too bureaucratic.

Sir David’s report follows six months of consultation with banks, large shareholders and other stakeholders and is made up of his initial findings. He will consult further, with a final document published in November.

While Sir David has suggested a raft of new ways to improve corporate governance, he does not call for new legislation. He says the Combined Code, the main rulebook on governance, remains “fit for purpose”, with the “comply or explain” rule the “surest route to better corporate governance”.

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