Opinion: Shareholders start to flex their muscle on high pay in banks

The Association of British Insurers, whose members are significant shareholders in UK banks, has written of its concern over remuneration in the banking sector in the most stern terms. The ABI’s Director General Otto Thoresen has highlighted the

need for all banks to fundamentally restructure their remuneration practices.

This follows on from the independent High Pay Commission’s report into executive remuneration, which emphasised the need for shareholders to play an activist role in setting top pay – the letter appears to be a first step towards a large number of shareholders in UK banks taking just such a stance.

The ABI’s concerns relate to both the payment of high salaries and bonuses in an environment where banks’ profitability has fallen, and the structural distortions that such remuneration causes. Using diplomatic language to condemn what are commonly referred to as ‘rewards for failure,’ the ABI calls for banks to

reduce variable awards in the context of outcomes that significantly reduce profitability or impact the underlying financial strength of the bank or its risk profile.

The letter also raises concerns that as banks are required to hold more capital as regulation is tightened through the likes of the Basel III agreement and the imminent implementation (we hope) of the Vickers reforms, that such higher capital is held at the expense of some the salary bill as well as the return to investors in the shape of dividends.

In addition, they debunk the myth that high pay is justified by the need to retain ‘talented staff’ who would otherwise be poached by other banks, possibly abroad.

This strong call for ‘fundamental shifts in remuneration practice,’ which means ABI members ‘expect to see significantly lower bonus pools and individual awards given the current market circumstances,’ echoes Deputy Prime Minister Nick Clegg’s insistence that unjustified boardroom pay will be clamped down on. As I argued recently, Lib Dems in government should be pushing for measures that curb excessive pay, and its good to see the DPM and the ABI flex their muscle on this issue.

The ABI’s intervention could be significant as there is concern that shareholders are either not empowered enough to hold remuneration committees to account, or are simply disinterested in social justice because they see their shares as an ephemeral trading commodity rather than a stake in the business. It may be that such concerns, expressed by Professor Prem Sikka in the Guardian, will prove to be unfounded if the ABI’s concerns are taken seriously. Nonetheless there is a need to keep a watchful eye on excessive pay in banks and the financial sector as a whole – with bonus season approaching, I for one will be hoping that the ABI is listened to. If not, it may be time for shareholders institutional and individual to escalate the battle to control top pay.

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6 Comments

  • Shareholders need to be actually represented on remuneration committees, not just have a vague veto power over it. I also favour having frontline workers represented on remuneration committees. These measures would ensure fairer wage ratios, as well as an attitude of long term investment over short term profit maximising.

  • Prateek Buch Prateek Buch 9th Dec '11 - 1:01pm

    @IainBB, @Jack – agreed, and worker representation on boards and rem coms is front and centre as Lib Dems try to work out how to make corporations fairer and more accountable!

  • I be happier still if outright employee ownership or at least co-ownership was was ‘front and centre’ in our reform agenda

  • Simon McGrath 10th Dec '11 - 9:22am

    I remember the days when Liberals supported employees not shareholders.

    @ jack – shareholders are represented on Remuneration Committees – that’s what their elected Directors are for.

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