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For keen watchers of bankers’ pay, HSBC’s remuneration disclosures on Monday were exemplary. Chief executive Stuart Gulliver might get paid a lot of money (£7.4m in total for 2012), but at least investors know the exact whys and wherefores.
The bank judged his performance on eight criteria, scored him accordingly and disclosed the results (full marks in some areas, such as capital strength; zero in others, such as compliance, following its vast fine from US regulators over money laundering).
In one area, though, HSBC’s pay policies – like those of many other banks – fall badly short. “Clawback” – the admirable concept by which previously promised pay can be recouped by a bank if things go awry – is widely talked about but rarely exercised to any great effect.
New rules on bonuses were introduced in the European Union in 2010. Similar measures are emerging in the US. And the Swiss banks brought in an equivalent concept of “malus” – a negative bonus – in 2008. And, at a time when banks are plagued by past scandals – from money laundering and Libor manipulation to the mis-selling of insurance and interest rate swaps – this would seem the ideal time to be exercising clawbacks in large number.
Yet, so far, clawback amounts have tended to be tiny. Compared with its annual $20bn pay bill, for example, HSBC last year clawed back just $700,000 of bonuses. Banks say there are two big obstacles to using clawbacks to dent the cost to shareholders of fines or compensation payouts. First, the scandals often predate the clawback provisions. Second, only a handful of staff are usually to blame for an issue, meaning that even fully recouping those bankers’ old bonuses would raise very little cash.
HSBC has yet to exercise clawback in relation to its money laundering scandal, but bankers think only a few million dollars will probably be recoverable, compared with the $1.9bn penalty it paid.
Recent results from other lenders tell a similar story. UK rival Lloyds said last week that it would use clawback to offset the cost of its big scandal, the mis-selling of personal protection insurance (PPI). But bankers say the precise amount, while still unclear, is unlikely to surpass £3m. That compares with Lloyds’ PPI bill to date of £6.8bn, giving a recovery rate of something like 0.0004 per cent.
RBS disclosed last week that it had taken back £59m of previously assigned bonuses, and planned to recover another £13m in future years, as it offsets the cost of its £390m Libor settlement. In total, that is more than 18 per cent of the bill. The scope of the recovery stemmed partly from the nature of the scandal – Libor abuses took place among investment bankers, who tend to have large deferred bonuses that are therefore available for clawback. In addition, there was pressure from the UK government, RBS’s lead shareholder, for political as well as economic reasons.
Barclays has yet to publish details of its clawbacks, but they are expected to come out at about £300m – mostly related to the bank’s £290m Libor penalty, but also to other transgressions. Bankers say Sir David Walker – Barclays’ newish chairman and a well-known corporate governance reformer – has been the driver of the aggressive clawbacks.
Other banks need to find a way of replicating what Barclays and RBS have done – and policymakers should be doing more to support the idea.
Which is why the EU’s controversial new bonus cap idea is misguided. Much has been written about the shortcomings of the proposal to limit bankers’ bonuses to the level of basic salary. Some banks will merely inflate salaries. Others will dodge the rule through newfangled pay structures. Overall, it will hurt the competitiveness of European banks.
Most fundamentally, though, it is the precise opposite of what banks should be doing. If anything, it is upfront salaries that should be capped, with bonuses driven up as a proportion of overall pay.
It is time to rehabilitate bonuses. In the past, they were foolishly structured: paid upfront with little link to performance, or based on crude measures of success such as revenue or profit, regardless of risk.
But, used wisely, they are the key to holding bankers – from branch salespeople to derivatives traders – responsible for the consequences of their actions. Only if a large proportion of someone’s overall pay is granted as a deferred variable sum can a large proportion be clawed back in case of later blow-ups. Brussels policy makers should wise up to that.
Patrick Jenkins is the Financial Times’ Banking Editor
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