CITY FOCUS: Shareholders finally get tough on bonuses
Three years afterthe global bankingsystem wasbrought to itsknees, hand-wringingregulatorsand tub-thumpingpoliticians have doneprecious little to derail theCity bonus gravy train.
This year’s pot is projectedto be ‘only’ 4.2billion comparedwith 6.7billion last year and morethan 11billion in 2006 and 2007,but this apparent restraint isa symptom of falling incomerather than humility.
Tortuous discussions on theseeming inability of the powers-that-be to effect real changealways lead back to one place:shareholder engagement, orrather, the lack of it.
In the spotlight: The pay of top City workers is increasingly under scrutiny
Even the UKFI – the body thatholds the taxpayer’s stakes inLloyds and RBS – is content torepeat the mantra that it is an‘arms length’ investor withlimited power or desire to crackdown on pay.
But today, in an unprecedentedclarion call to make even themost brazen fat cat splutter onhis cigar, the largest group ofinstitutional investors in the landhas found its public voice.
In a no-nonsense letter to UKbanks, the Association of BritishInsurers (ABI) warns that membersare expecting ‘significantlyless bonus pools and awardsgiven to individuals given thestate of the market and economicenvironment’.
Topping its list of grievances isthat executive rewards tend tomultiply whether or not shareholderreturns follow suit.
The ABI also warns that bankswho build up cash cushions toweather the eurozone stormshould not axe dividends withouta parallel reduction in pay.
City lobbyists point out that27,000 jobs have gone in theSquare Mile this year, but as theABI attests, hundreds of staffcould have been saved if executiveswere willing to share thepain.
Investors, even the public, cansympathise with a banker leavingtheir desk for the last time with acrate of possessions, until theysee that the crate is emblazonedwith the stamp of Chteau LafiteRothschild 1982.
In the upper echelons, therewards on offer this year are stilljaw-dropping. Managing directorsare expecting an average 2011bonus in the order of 166,000, a70 per cent windfall on a basic salary of237,000, according to researchfirm Astbury Marsden.
This festive bonanza comes asthe OECD reveals that the UK’swealth divide has widened fasterin the past three decades than inany other rich nation. In the runupto Christmas, it isn’t just thegoose that is getting fat.
The ABI also draws banks’attention to two of its existingprinciples.
One is that when executives areawarded shares worth, forinstance, 300 per cent of salary after abig stock market fall, they end upsitting on many more shares thanthey would otherwise own.
Given that their potential profitis therefore greater, boardsshould scale back the level ofsuch payments.
Further, where a bank’s performanceis hit by a one-off eventsuch as the sovereign debt crisis,management should not get paidanyway simply because suchevents are out of their control.
After all, shareholders have nosuch recourse.
Finally, the ABI has blown agaping hole in one of the greatflat-pack defences that City lobbyiststurn to when they want tofrighten politicians.
‘Now is the time to do it[address pay] as retention risksin the sector have diminished,’says the shareholder body. It isno longer an excuse to say thathigh pay awards are the only wayof keeping good staff in the currentclimate.’
In other words, the body representingBritain’s biggestinvestors believes the threat ofa brain drain is a busted flush.Business Secretary Vince Cableis already looking at giving staffa seat on remuneration committeesand making pay votesbinding.
Bank of England policymakerAndy Haldane suggested lastweek that bonuses should not belinked to return on equity – anindication of performance thatfails to factor in the risks associatedwith high leverage.
Amid the pressure on banks,the fact that the ABI has finallylost patience may carry some realweight.
As investor sources pointed outyesterday, shareholder votes onpay may not be binding, butinvestors have long memorieswhen management comes beggingfor their support in a rightsissue.
On Monday, the FSA’s reportinto Royal Bank of Scotland willremind us all of the dangersposed by rapacious dealmakerschasing a fast buck.
Before the end of the year, theIndependent Commission onBanking will be telling bankswhat it wants them to do toreduce the risk of another taxpayer-funded bailout.
Against this fraught backdrop,remuneration committees aremeeting even now to discuss thisyear’s pay deals.
The likes of Goldman Sachs andDeutsche Bank – foreign institutionswith London divisions – willmost likely go on doling out massiverewards.
They will likely remain unfazedby the minor nuisance posed by aBritish investor body and the politicianswho govern a small islandon the wrong side of the Atlantic.
But any show of defiance fromtheir British counterparts willsurely meet with furious anger if,as many economists expect, thesqueeze on household financesrefuses to abate quickly.
If banks ignore the ABI’s timelyintervention, they do so at theirperil.
No related posts.