IT USED to be that the banking bonus season was when senior executives in the industry earned bragging rights, but this is no more.
It was said that Bob Diamond, the high-flying chief executive of Barclays bank, got upset if newspapers underestimated his annual earnings. Barclays this week will confirm that he will get a remuneration pot worth £10 million, which is set to fan the flames of public rage.
This will be the same fury that forced Stephen Hester, the chief executive of Royal Bank of Scotland, his chairman Sir Philip Hampton and the chief executive of Lloyds Banking Group, Antonio Horta-Osorio, to waive their multi-million bonuses in recent weeks.
The vast sums bankers and other senior executives pay themselves – Diamond and Hester are not even the most highly paid in their respective organisations – is difficult for most people to grasp.
The difference is that most employees are paid a flat hourly, weekly or annual wage, while others, such as most senior managers, chief executives, and those who work at the sharp end of the financial services sector, get bonuses on top of their salary, or “performance-related pay”.
The notion of payment on the basis of how well the executive has performed has been around only for about 30 years.
Anyone who has ever worked for a commission on sales understands the concept of performance related pay. But it became more common in the boardroom when investors thought it would be more effective if the managers of the business were incentivised to act more like owners, with share awards and bonuses in line with dividends. It seemed fair that if one go-getter doubles income, while his or her colleague brings in flat sales and books off early to play golf, this should be recognised and rewarded.
But if the level of public opprobrium is an effective measure, somewhere along the way performance related pay has gone haywire.
The latest chief executive criticised for receiving a “reward for failure” was Sly Bailey. Although the pay of the Trinity Mirror boss has been frozen for four years at £750,000, this was topped up last year by a £660,000 bonus. This is despite having overseen a collapse in the company’s market value from £1.1 billion when she joined in 2003, to around £127m today.
But performance related pay is not just based on share price. There are less desirable ways of measuring performance. It is understood that one of Andy Hornby’s main incentives, when he was chief executive of HBoS, was to grow mortgage market share no matter how poor the quality of the loans.
It could be argued that metrics based on “normal” growth no longer works when markets and industries have largely come crashing onto the rocks of the banking crisis and the resulting economic turmoil. The terms of the performance pay, set in the good times, did not include the opposite – punishment for failure. This was not deemed necessary even well into 2008, when the banker formerly known as Sir Fred was allowed to walk away from RBS with a pension pot the size of Denmark.
This trend is turning. Remuneration committees are encouraged by shareholders to pay bonuses, if deserved, in shares, often deferred to ensure that decisions aren’t taken for this year’s gain but at the cost of next year’s loss.
And if any severance packages have been written into the contract, then these could be strung out perhaps over five to 10 years, and still based on share performance rather than cold hard, undeserved cash.