(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, Aug 14 (Reuters Breakingviews) - David Walker has a golden opportunity. Barclays’ (BARC.L) incoming chairman wants to reform the UK bank’s freewheeling bonus culture, epitomised by the king-sized pay packets of former chief executive Bob Diamond. Often, the mere talk of pay restraint prompts an exodus of traders heading for more spendthrift competitors. But Walker has key advantages.
Following the furore over Diamond’s intended 2011 bonus, Barclays found itself in investors’ bad books. But many other investment banks found themselves in a similar place. UBS UBSN.VX and Credit Suisse CSGN.VX both suffered hefty protest votes, while Citigroup (C.N) shareholders voted against its remuneration report. With the investment banking slowdown looking structural, it’s unlikely that disgruntled Barclays investment bankers would have too many places to go should they dislike Walker’s proposals.
Besides, Barclays currently appears more generous than peers. In 2011, total compensation was 47 percent of income in its investment bank, Barclays Capital, above the average 41 percent for big peers like JPMorgan (JPM.N), Goldman Sachs (GS.N) and Morgan Stanley (MS.N). Barclays’ compensation ratio could at least fall into line with rivals.
The Long-Term Incentive Plans (LTIPs) of Barclays’ executives are also ripe for reform. As things stand, Barclays bosses’ LTIPs give share grants of up to five times salary – though they are deferred for a three year period and can be clawed back if things turn sour. HSBC’s (HSBA.L) clawback period is five years, and its bosses cannot sell the shares unless they retire or leave. Another way to encourage prudence might be for Barclays to grant debt as well as equity instruments as part of the overall pay package.
Barclays could take a further step. Back in May investor anger pushed the bank into making half of Diamond’s annual bonus contingent on the bank at least exceeding its 11.5 percent cost of equity by the end of 2015. Walker could argue that all awards should be contingent on economic returns. Walker himself suggested in his 2009 review of UK corporate governance that executive rewards be based on an ability to generate economic profit. He can now practice what he preached.
Investors, regulators and politicians – to say nothing of public opinion – expect Walker to adopt a progressive position on bankers’ pay. Judging by the comments he has made since accepting the Barclays post he has just those intentions. He now has the opportunity to strike while the iron is hot.
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- Reform of Barclays’ remuneration culture is “partly a question of level and partly of structure”, the UK lender’s new chairman told the Sunday Telegraph. on Aug. 12.
- David Walker’s review into banks’ corporate governance in 2009 said that bonus pools should be determined by reference to economic profit rather than revenue.
- Reuters: Barclays shares rise as Walker comes in to clean up [ID:nL6E8JA5WP] - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Robert Cole and David Evans)
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