If profits rise, it’s thanks to the bankers’ talent; when they fall, it’s always someone else’s fault
Few publicly support rewards for failure: but ‘success’ is proving a very elastic concept when it comes to calculating bonuses
Another week, another bonus row – this time for Barclays boss Bob Diamond, who testily refused to say whether he would be taking a payout when the bank announced less than sparkling financial results on Friday.
Unlike RBS, where Stephen Hester reluctantly succumbed to public pressure and waived his bonus of almost £1m, Barclays is not majority-owned by the state. But the ebullient Diamond, who ran its investment banking arm BarCap for many years, is just as vulnerable to the charge that a whole generation of Britain’s top managers have walked away with far more than their fair share.
The report of the high pay commission – which has tracked the pay explosion in the boardrooms of FTSE 100 companies over the past decade and made a series of proposals to rein in excess, including worker representatives on remuneration committees – was widely taken up by politicians, because it captured the public mood.
Even in good times, it was hard for the average punter to believe the sums being trousered in the Square Mile could possibly be justified. With the country reeling from austerity, learning that cash bonuses at BarCap – where average pay is £200,000 – had been “capped” at £65,000 (they can have far more in shares) is unlikely to have reassured them that a new age of restraint has taken hold.
Diamond blamed “worse than expected macroeconomic conditions, in addition to new regulatory constraints” as he explained why the bank had missed its target of a 13% return on shareholder equity by a mile.
But there’s an asymmetry here: when the good times were rolling, back before the credit crunch, few chief executives were willing to concede that rampant growth and hands-off regulation were responsible for their banks’ strong performance. Instead, shareholders and the public were led to believe that it was the sheer genius of top executives and their teams of savvy traders that were responsible for banks’ bumper profits.
Politicians, too, swallowed the notion that the men running Britain’s giant banks must be uniquely talented individuals, akin to superstar footballers, who had to be cosseted, lest they up sticks and leave.
Thus the cult of “performance-related” pay not only took root among the City’s finest, but spread from the bankers to their lawyers and accountants, the chief executives running the firms for which they brokered mega-mergers, and anyone else who found themselves at risk of losing bragging rights on the golf course. Increasingly byzantine arrangements for avoiding tax also became the norm, both for corporations, and – as the scandal of student loans boss Ed Lester showed – individuals.
Sir Richard Lambert, the former director of the CBI, told Radio 4’s Today programme last week that the benchmarking of executives’ pay against their peers worked as a “ratchet”, pushing rewards ever higher. And as the pay commission pointed out, the structure of many of these top deals, with yearly cash bonuses layered on top of multiple long-term incentive plans, on top of lavish base salaries, has become so complex that it is often impossible for shareholders to work out how much executives are due.
The chancellor, George Osborne, stepped into the row last week, warning that the continued furore about executive rewards risked creating an anti-business backlash.
But there is little academic evidence that performance-related pay actually motivates already very highly paid staff – and a growing argument that, by fuelling inequality, these bumper rewards left the economy vulnerable in the runup to the credit crisis and is now holding back recovery.
The vast majority of businesses in the country, many of them modest family firms, would barely recognise the swashbuckling culture that has taken root in Britain’s boardrooms. Politicians have criticised “rewards for failure”: few, after all, would want to admit to supporting them. But it’s time to re-examine whether rewards for success, too, have simply become too high.
Into the abyss
The eerie mood of calm that had descended on the world’s financial markets since the European Central Bank’s €500bn emergency lending operation in December was brutally shattered on Friday, as tear gas and riot police returned to the streets of Athens. After days of wrangling, Greece’s coalition government hoped it had agreed an austerity package severe enough to win over the “troika” of the ECB, the IMF and the European commission – for which read the Germans – and persuade them to unlock the €130bn rescue package it needs to avoid running out of money in March. But after its paymasters refused to approve the deal, support for Lucas Papademos’s coalition crumbled. Greece faces being forced out of the single currency. This crisis is far from over.
“He wants to make a mark as the Rothschild of his generation,” Sir Julian Horn-Smith told the Financial Times last year. The former Vodafone boss was talking about Nat Rothschild, the ambitious 40-year-old who was laying out plans to turn a cash shell called Vallar into a global coal giant and member of the FTSE 100.
A year on, Rothschild has a starring role in the soap opera that Vallar, now renamed Bumi, has become. The company’s original backers are sitting on a 25% loss on their shares; Rothschild risks being removed as co-chairman by his Indonesian partners; and Horn-Smith, a Bumi non-executive director, has been dispatched to Jakarta to try to broker peace.
The first stage of Rothschild’s idea was cleanly executed. A collection of investing institutions put up £707m, which Vallar used to buy stakes in two Indonesian coal mines, including a 29% slice of PT Bumi Resources. The Indonesian Bakrie family, the people behind Bumi, took a 47% stake in the London-listed entity but their voting rights were capped at 29.9% – a critical element in Rothschild’s promise to deliver good corporate governance.
It was all downhill after that. In an open letter last November, Rothschild called for “an immediate transformation” of how PT Bumi is managed. That appears to have gone down badly in Jakarta. Then the power base at the Indonesian end shifted as the Bakries sold half their Vallar/Bumi shares to fellow Indonesian Samin Tan. Indira Bakrie and Tan are now united in wanting to remove Rothschild as co-chairman, and possibly push him off the board altogether. Rothschild, whose stake of 11.7% is much smaller than theirs, is portrayed as having served his purpose in engineering the London listing. It’s a fine old mess.
In that FT piece, Rothschild said “coal mines all look the same, they’re just bigger or smaller”. OK, but that doesn’t mean they can all be transformed easily into members of the London Stock Exchange, with UK-style governance in the boardroom.