Bank chairmen talk pay

At the BBA annual conference, the chairmen of HSBC, Standard Chartered, Barclays, RBS and Lloyds give their views on where banking industry pay is going.

If you listen closely to what they are saying, bank chairmen reckon it is time to move on from the emotive discussion on bankers’ pay.

Compared to all the other issues with which they have to deal — resolution regimes, capital requirements, ring fencing regulation, Libor scandals — pay is the one area they feel closest to being able to tick off their to-do list.

At the annual conference of the British Bankers’ Association on Wednesday, the chairmen of the country’s five biggest banks sat down to discuss their attitude to pay.

Douglas Flint from HSBC, John Peace from Standard Chartered, David Walker from Barclays, Philip Hampton from Royal Bank of Scotland and Win Bischoff from Lloyds presented a united front, as befits four knights of the realm and one commander of the British Empire.

Their message was that pay has been too high, but great steps have been taken to bring it back into line. It is now coming down and will go down further, they said. But at the same time, banks do need to do more to explain the metrics behind bankers’ pay. They also need to compare this pay with other industries and defend the principles behind pay structures to keep the industry competitive.

“Banks have not been very good at explaining what the primary purpose of banks is and the role we play in society,” said Bischoff from Lloyds. “As a result, people have been confused by the complexities. But high salaries and high incentives are paid in many industries. However, we have to make sure that incentives are paid out of profits after tax and after the shareholders have been paid.”

Hampton at RBS noted that all the metrics around RBS’s pay had been heading down for the past four years, but he admitted that “pay had been grotesque and completely out of line with pay in other sectors and in comparison to the returns to our shareholders”, he said. “But pay is falling quite sharply now.”

The chairmen of those banks with an international footprint were at pains to differentiate between attitudes to pay in Europe and the UK, and with those in the US and Asia. According to Flint, bashing banks’ bonuses is a sport only played in Europe and the UK.

“Europe has an equal concern over where pay levels [in banks] had got to as the UK,” he said. “But in other parts of the world where the economy is doing well, there is no sense of outrage as bankers are seen as facilitators of economic growth.”

Peace at Standard Chartered supported this view that the issue of pay is one that is correlated to the wider role that banks play in society. “When the pie is shrinking it shapes the attitude of the public and politicians,” he said.

Walker at Barclays agreed with this idea, extending the logic to the shareholders of banks.

“Shareholders were not interested in this when profits were rising,” he said. “But now the share of profits between executives and shareholders does need to be looked at.”

In particular, Walker said that bonuses paid out of not just unrealised profits, but simple revenues, were deeply suspect. “There are questions over the appropriateness of incentive structures which are revenue related ... these are fundamentally flawed and corrupt,” he said.

He added, somewhat ominously for employees of Barclays, two potential new avenues of pay in the future. First, on bank sub-debt forming a part of bonus packets, alongside equity, he said: “In principle this is very interesting. But it is an important predicate to get bank investors interested in these so-called cocos first.”

He then added (with a phrase that will surely be seen again at bonus season): “This industry was the first to pay bonuses but it will also be the first to pay maluses [negative bonuses or claw backs]. This is work in train at the moment.”

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