guardian.co.uk,
Jill Treanor, City editor, Monday 5 December 2011
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| Bob Diamond, head of Barclays Bank, is one of five top bankers whose pay is targeted in a letter from the ABI. Photograph: Dylan Martinez/Reuters |
Britain's
major banks have been warned in the starkest terms that they need to
"significantly" reduce their bonus pools or face conflict with major
investors that want to call time on bumper payouts.
In a highly
unusual step, an influential group of shareholders accounting for about 15% of
the stock market last night wrote to the chairmen of the five biggest banks to
make it clear that they would no longer tolerate the "business as
usual" culture that has permeated the City since the 2008 banking crisis
and want to see pay cuts for executive directors.
Just days
after the Bank of England called on banks to restrict bonuses and dividend
payments to shareholders, the Association of British Insurers (ABI) has told
bank boards that pay deals for individual bosses – as well as their workforces
– are high on their agenda.
The deputy
prime minister, Nick Clegg, has also committed the government to a crackdown on
top pay.
The letter
has been sent to the chairmen of HSBC, Barclays, Standard Chartered and the
bailed-out banks Royal Bank of Scotland and Lloyds Banking Group. It has also
gone to the heads of the remuneration committees at each bank.
The move
suggests pay deals for Stuart Gulliver, Bob Diamond, Peter Sands, Stephen
Hester and António Horta-Osório – those banks' respective chief executives –
will face intense scrutiny.
Shareholders
also make it clear that they no longer accept the argument that banks need to
pay bonuses to stop their stars being poached, as jobs are being cut in the
City. Nor do they want bank boards to overlook costly mistakes – such as
mis-selling of payment protection insurance – when setting bonuses this year.
"It is
our members' view that it can no longer be business as usual for this
remuneration round," Otto Thoresen, director general of the ABI, said in
the strongly worded letter.
"They
expect to see significantly lower bonus pools and individual awards given the
current market circumstances. It is essential that all banks take, and are seen
to take, a responsible approach."
The ABI
represents major insurance companies, which invest billions of pounds of
customer money in pensions and life insurance polices.
Shareholders
are keen to respond to past criticism that they did not do more to avert the
excesses that led up to the banking crisis and to put a lid on bankers' pay.
Attempting to restrict the size of pay awards for bankers is their strongest
response yet to the fact that the banking crisis has not stopped banks paying
bumper bonuses to top staff.
They are
also mindful that the pressure on banks by the Bank of England to hold more
capital in preparation for a worsening of the eurozone crisis could result in
lower dividends for them while employees' pay deals are preserved. "Any
capital retention should not be solely funded by a reduced payment of
dividends," said Thoresen.
"As
bank remuneration is currently structured, our members are concerned about the
level of returns that shareholders receive compared to the returns given to
employees. Members believe that in recent years this balance has been
inequitable, with too much value being delivered to employees in contrast to
the dividends paid to shareholders.
"The
reduction in employee payout ratios needs to be achieved by reducing individual
remuneration payouts to highly paid employees, including executive directors,
and not by just reducing employee numbers. Our members believe this year is the
time to make these changes."
Bankers'
bonuses are often paid in shares, and shareholders are also concerned that
banks' current low share prices means directors could be awarded large amounts
of shares that will produce windfalls once share prices start to rise.
The call
from the ABI comes as the Bank of England's financial policy committee – set up
to look for systemic problems in the markets – is preparing to discuss whether
bank directors should have their pay linked more closely to the risks they run
by basing it on return on assets rather than the current basis of return on
equity.
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