Breakingviews:Lloyds should change CEO bonus vesting, not size

Fri Jan 18, 2013 3:24pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By George Hay

LONDON, Jan 18 (Reuters Breakingviews) - A storm is brewing over at Lloyds Banking Group (LLOY.L) over Antonio Horta-Osorio’s bonus. Like peers, Lloyds was shamed in 2012 for past mis-selling of mortgage insurance. Yet there was progress in restructuring and its chief executive deserves recognition. The question for UK Financial Investments, which manages the government’s 40 percent stake, is how it can advocate the award to its political masters.

On many financial metrics, Lloyds had a strong year. Although the doubling of the share price was achieved with European Central Bank assistance common to all banks, Horta-Osorio has presided over falling impairments and a deleveraging programme that has now shed 200 billion pounds from the lender’s balance sheet. Against that, Lloyds’ expected tab for Payment Protection Insurance compensation now exceeds 5.3 billion pounds.

UKFI therefore has a tricky balancing act. To the general public, and thus to politicians, Horta-Osorio’s maximum 2.4 million pound potential bonus will be unacceptable. The resulting firestorm could leave him like Royal Bank of Scotland (RBS.L) boss Stephen Hester who, having yet again voluntarily waived his award in 2012 after his bank’s computer system packed up, has now received only one bonus of a potential four.

The long-term solution may be to scrap annual bonuses for bosses of state-owned banks. Lloyds and RBS could make their bonuses more like Long-Term Incentive Plans (LTIPs), where a nominal number of shares are awarded at the start of a three-year period, and then handed over at the end if specific criteria are met.

It’s too late to do this for 2012, but UKFI may have a short-term fix. Horta-Osorio’s current share-based annual bonus pays out 40 percent in the first year, and the rest staggered in following years. Instead, the Lloyds boss could agree to only receive it in three years’ time.

The overall size of the bonus would still raise hackles. But UKFI could legitimately claim Horta-Osorio is worse off if the shares fall, and the award could be clawed back if things go wrong. The Lloyds boss’s irritation would be offset by actually getting a bonus, and by the potential for the shares to rise. It’s not ideal. But it’s better than winding up with nothing.

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CONTEXT NEWS

- Lloyds Banking Group Chief Executive Antonio Horta-Osorio is eligible for a bonus equal to 225 percent of his annual 1.06 million pound salary for 2012.

- For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Chris Hughes and Sarah Bailey)

((george.hay@thomsonreuters.com))

((Reuters messaging: george.hay.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS LLOYDS/

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