EU cap makes bank bonuses worse than ever
Jonathan Lindsell, 25 February 2014
Whether you love your bankers free range and content or caged and taxed to the nines, the bonus cap was a bad idea. It was clear before the measure even passed that capping bonuses wouldn’t actually restrict behemoth payouts. Now HSBC has shown they can still award eye-watering sums with a little jiggery-pokery – their acrobatics are actually worse than before.
To review: last year the EU passed rules that banks couldn’t reward employees bonuses over 100% basic annual salary, or 200% after shareholders’ agreement. In September 2013 George Osborne challenged the law in the European Court of Justice. This, along with three other UK vs EU cases (Euro-bonds, Robin Hood tax & short selling limits), will take years to resolve.
HSBC’s solution is rather more swift. Yesterday Britain’s biggest bank presented its new ‘remuneration policy’, which dives headfirst through the gigantic loophole the EU law left: there are many kinds of reward besides cash bonuses. Their chief executive, Stuart Gulliver, will see his basic pay jump from £1.2 million to £2.9 million thanks to a £32,000 weekly shares ‘fixed pay allowance’. In 2012 the top HSBC earner (presumably Gulliver) earned £7 million: £650,000 in salary and £6.35 million bonus. Now Gulliver is certain to earn £4.2 million, potentially £11.4 million if he actually does a good job.
It’s important to note that the £6.35 million bonus in 2012 was subject to ‘clawback’ and ‘deferral’ – shareholders could delay or change their mind if Gulliver was not working effectively. Clawback is virtually impossible with a direct salary. Other employees will have less incentive to work hard through the year, since they’re already assured higher salaries simply for turning up. This was wholly predictable – numerous analyses noted that banks would either increase basic salary to make up the bonus shortfall, or award remuneration in quasi-salary forms like allowances or shares.
The new pay structure is demonstrably worse. Shares are more difficult to tax, and top bankers will be less accountable. On two counts – using up more bank money by cranking up base salaries so reducing spending flexibility, and disincentivising long term commitment – the bonus cap is actually destabilising the financial sector, the exact opposite of its EU architects’ dreams. The Bank of England and Treasury voiced concerns that banks are failing to adapt to the financial crisis’ lessons: spending stability, higher capital requirements and larger liquidity reserves should now be received wisdom. The TUC were critical too, calling HSBC’s action, “soaraway boardroom greed”.
HSBC’s 2013 annual report showed that profits rose 9% to $22.5bn (£13.6bn), while its bonus pool for staff rose 6% to $3.9bn. 330 staff were paid over a million euros last year. In contrast, Barclay increased bonuses by 10% even though its profits fell 32%.
Lloyds and the Royal Bank of Scotland are expected to follow suit: RBS, currently 81% taxpayer owned, will have to reveal its remuneration plans by Thursday.
Update: Lloyds and Barclays are indeed at it as well. 06/03/14