LONDON, April 25 (Reuters) - High levels of pay among senior bankers are becoming a lightning rod for investors increasingly dissatisfied with the paltry returns they are getting from European banks and this is likely to stir them to revolt at upcoming shareholders’ meetings.
The focus on disappointing dividends for investors and generous remuneration for bankers will increase pressure on an industry already facing criticism from the public and politicians for its reluctance to accept its share of responsibility for the global financial crisis.
Shareholders are not only angry about bank executives’ pay, they are also dubious about banks’ planning for the handover of top roles, uninspired by the level of management competence, troubled about weak business models and generally worried by grim prospects for the sector.
As a result, some of Europe’s biggest banks could be badly mauled at the forthcoming round of annual shareholders’ meetings starting in earnest this week. And although few are in real danger of having their pay plans rejected, all are braced for a level of scrutiny they will find unwelcome.
Firmly in investors’ sights are Barclays and Deutsche Bank, which are expected to suffer a backlash against lucrative executive pay deals at a time when investor returns are low and look like staying that way.
Switzerland’s UBS and Credit Suisse are also in the line of investor fire as critics say their generous pay plans ignore the troubled year the banks have endured.
Europe’s economic troubles are likely to increase the scrutiny on pay elsewhere too.
“Bank dividends have been decreasing, at the same time pay cheques of executives and supervisory board members are rising. That’s alarming,” said Bernd Guenther, an activist shareholder from the Hamburg-based financial services group Idunahall.
A warning shot for Europe’s banks has been fired in the United States, after shareholders in Citigroup surprisingly voted down its executive pay plan.
Activist groups are disrupting meetings there, and protesters at Wells Fargo’s AGM on Tuesday turned up with a huge inflated rat, pockets stuffed with dollar bills, in protest at executive pay and other issues. Two dozen were arrested.
Barclays had already been scrambling to appease investors who were unhappy with the 17 million pounds that Chief Executive Bob Diamond took home last year. The bank last week tweaked the award, although many critics said it had not done enough.
Pirc, a shareholder advisory group, has urged investors to reject Barclays’ pay plan although it does not expect the bank to be defeated. But it said there has been a shift in mood.
“What was acceptable in pay at the banks three or four years ago is now potentially explosive,” Pirc said.
Deutsche Bank’s pay has been cricitised by UK fund manager Hermes. There has also been criticism of the protracted way Deutsche handled its change of leadership.
Backed by a group of 27 pension and investment funds, Hermes Equity Ownership Services said investors should not vote for a resolution approving the supervisory board’s performance. It is angry the bank is not giving shareholders a vote on pay this year, even after a rejection by 42 percent of investors two years earlier.
Barclays’ Diamond, Credit Suisse CEO Brady Dougan and incoming Deutsche Bank co-CEO Anshu Jain are among the best paid bankers in Europe, each getting an annual salary and bonus of around 5 million euros or more.
Bonuses have generally dipped in the last two years, although executives are benefiting from awards from previous long-term plans. Diamond’s salary and bonus of 6.3 million pounds was down from 9 million in 2010, for example, but swelled by his past pay awards.
There can also be generous pension allowances and benefits for housing, medical plans, tax advice or chauffeurs. Barclays is paying 5.7 million pounds to cover a tax bill for Diamond to avoid double taxation when he moved back to London from New York.
Politicians have warned they could take action to cap high executive pay, responding to public fury at the scale of awards so soon after the financial crisis. Reckless activity by banks has been blamed for deepening a crisis that has seen tens of thousands lose jobs or forced to take pay cuts.
Investors, meanwhile, have seen Europe’s banking shares fall more than 30 percent in the last year while dividends are modest. UK banks paid about 6 billion pounds in dividends last year - mostly from HSBC - up about 15 percent from 2010 but less than half the 15 billion pound payout in 2007.
Across the industry, non-executive directors have failed to rein in excessive pay or hold executives to account for the errors and omissions which led to the financial crisis, with corporate governance still “woefully inadequate and ineffective,” said Neil Dwane, CIO of RCM Europe, the equities unit of Allianz Global Investors.
“As an investor, one can only avoid this sector for one’s clients - which is a shame as this industry badly needs new external investors,” Dwane added.
Ethos, an influential group that makes recommendations to Swiss pension funds, said investors should vote against the pay plans at UBS and Credit Suisse.
Credit Suisse’s bonus policy is still opaque - it links the pay of 5,500 bankers to $5 billion in complex assets that tumbled in value during the financial crisis - and too high, even though the pot was cut by 41 percent for 2011, said Ethos spokesman Vinzenz Mathys.
UBS had not got the message from last year that executive pay is too high. And investors have been diluted by the award of about 8 percent of the bank’s share capital to staff in the last three years, reflecting excessive bonuses, Ethos said.
“Despite more than 30 percent opposition to the remuneration report in 2011, the board did not significantly amend the remuneration system,” Ethos said.
A 4 million franc sign-on bonus for its new chairman Axel Weber is not justified and is unacceptable, and “sends the wrong signal”, it added. UBS said it noted Ethos’s objections.
NON-BINDING, BUT POTENTIAL SLAPDOWN
The febrile mood could be shown on Friday, when both Barclays and Credit Suisse hold their AGMs.
Votes on pay are typically non-binding, but there have been calls to make them so.
One option could be to follow Australia’s model, which gives companies a year to revise policy if it is voted down. That would make the vote on pay binding if it is rejected for two consecutive years.
This year marks the 10th year when it has been mandatory for UK firms to have a vote on executives pay. Only one bank has lost the vote — RBS in 2009, when investors vented their fury on a generous pension plan for former CEO Fred Goodwin — and no others have come close, Pirc said.
Anger runs more deeply than with pay alone.
France’s Societe Generale needs to separate the roles of chief executive and chairman, according to activist fund PhiTrust, which this week said it has enough backing to force a vote on the issue at this year’s AGM.
The volatile business of corporate and investment banking is “too risky” to be put in the hands of the combined chairman-and-CEO position currently held by Frederic Oudea, PhiTrust said.
The paltry returns on offer for shareholders have stirred the activist mood.
Barclays boss Diamond admitted his bank’s return of 5.8 percent last year was “unacceptable”, which critics have seized on to say his pay shows “reward for failure”.
Few European banks delivered a return on equity of more than 10 percent last year, and the target of a more attractive 13 percent seems a long way off, investors and analysts said.
Shareholders say banks need to take a knife to pay more broadly across their companies to make returns attractive enough to keep them invested.
Decent first quarter results from Europe’s banks could help lift investors’ mood, but capital markets could struggle to return to the boom levels of years ago and tougher capital and liquidity rules look set to keep returns low by historical standards for many years.