By Chris Vellacott
LONDON, March 6 Banks are failing to rein in
excessive payouts for staff below the boardroom level despite a
public backlash against a bonus culture blamed for contributing
to the financial crisis, say leading investors.
While higher levels of engagement by shareholders and
political pressure since the crisis and the Libor rate-rigging
scandal have seen some top executives waive or take smaller
bonuses, lower ranks have not been subject to such restraint.
In Britain - a global investment banking hub and home to
most of Europe's top-earning bankers - the annual results season
has seen a series of banks disclose payments are on the rise,
angering some shareholders.
Investors do not have the power to veto the bonuses of staff
below boardroom level, but could voice dissatisfaction by voting
down directors' own remuneration packages.
"It certainly looks as though previous commitments we
received have been abandoned," said one fund manager with stakes
in British lenders including Lloyds, Barclays
and HSBC. The investor asked not to be named ahead of
meetings with the management of banks in which the fund holds
Reuters surveyed institutional investors whose stakes in
British banks amount to around $12 billion.
Last month Barclays said it raised bonuses at its investment
banking division by 13 percent in 2013 even as its profits fell,
prompting widespread criticism.
Business leaders' group the Institute of Directors said the
bank's bonus policy raised the question of whether it was being
run for its shareholders, or its staff.
"It does seem incredible to me that when profits go down
from the investment bank, they put bonuses up," said Martin
Gilbert, chief executive of Aberdeen Asset Management, one of
Europe's biggest fund managers, speaking at a conference.
Aberdeen is about to inherit significant stakes in
institutions such as Barclays and Royal Bank of Scotland (RBS)
when it completes the acquisition of Scottish Widows
Investment Partnership (SWIP).
Other banks lifting bonuses in 2013 included HSBC and
Lloyds. Outside Britain, Switzerland's biggest lender UBS
said it had increased its bonus pool for 2013 by 28
In the United States, Morgan Stanley, Bank of America
and JP Morgan raised average staff pay by 6.6
percent, 7.5 percent and 3.8 percent respectively, while Goldman
Sachs cut it by 4 percent.
Barclays CEO Antony Jenkins has said he had to increase
bonuses to stop key staff defecting to rivals and was quoted in
a British newspaper saying he feared a "death spiral" where the
bank struggled to attract good staff and its brand was damaged.
Some investors are not impressed by this argument, however.
"That's the story they always peddle. I think someone ought
to test their poker face on this one," said one Barclays
shareholder who also holds stakes in Lloyds, RBS and HSBC.
"A lot of the executives are doing the right thing in terms
of moderating their pay and refusing bonuses and things like
that. It's the level under there that it still looks out of
control," said the shareholder.
However, another Barclays shareholder acknowledged banks
were "between a rock and a hard place" on investment banker pay
because of the risk of losing staff but said the need to pay big
bonuses was detrimental to the bank's business model.
"It's bloody annoying. It's not what we want," the
Loss-making RBS - part nationalised after being bailed out
in 2008, and under pressure to restore its standing with its
political masters and the public - bucked the trend in Britain
with staff bonuses for 2013 down 15 percent.
Some investors in banks argue critics of bonuses are missing
the point as executive pay is now under much closer scrutiny,
particularly since shareholder votes on remuneration became
binding under new legislation last year.
"There have clearly been changes to the relationship between
boards and shareholders because we now have the binding vote on
the remuneration report," said Dominic Rossi, global chief
investment officer for equities at Fidelity Worldwide
Shareholder advisory group PIRC on Thursday said it will
advise investors to vote against "excessive remuneration
A package is deemed too much by PIRC if CEO bonuses amount
to 200 percent of base salary, pay rises faster than shareholder
returns or if the head of the firm's pay is more than 20 times
that of the average worker at the organisation.
It is rare for investors to block remuneration packages,
however 2012 saw a number of such revolts, dubbed the
Barclays' boss Jenkins waived his bonus for 2012 in
recognition of the bank's implication in the Libor scandal. When
Ross McEwan was appointed RBS chief executive in 2013, he said
he would forgo an annual bonus for 2013 and 2014 while he worked
on leading the lender towards recovery.
But some investors counter that this cultural change has
applied to the boards of listed companies who have to disclose
details of their pay in annual reports and submit them to
shareholder votes, but not the next level down.
Figures from Europe's banking regulator show that more than
3,500 bankers in Europe earned 1 million euros or more in 2012
with the financial hub of London, home to many global groups'
European headquarters, accounting for the lion's share.
The latest data from the European Banking Authority supports
the idea that pay restraint is not affecting the middle tier of
bankers. It shows 3,529 bankers in the EU earned at least 1
million euros in 2012, up 11 percent from 2011.
Britain accounted for 2,714 of those, up 11 percent on the
year before, partly reflecting London's position as Europe's
financial centre and home to big operations for banks from the
United States, Switzerland and other countries outside the EU.
However, Fidelity's Rossi highlighted since the 2008-09
crisis, banks have started deferring bonuses over at least three
years and paying more in shares than cash. This, banks argue,
diffuses the risk-taking culture that contributed to the crisis
by making payouts conditional on long-term performance.
"The fact is there has been quite a significant change in
the remuneration culture within banks and also the level of
engagement that is taking place between banks and shareholders
has never been stronger," he said.