A bad day for Barclays

Barclays’ AGM was a stormy affair. It started with protests about Barclays’ investment policies. For Barclays directors and shareholders, even getting into the Royal Festival Hall meant running the gauntlet of World Development Movement protestors, tax justice campaigners and other pressure groups, all with placards in Barclays’ corporate colours spelling out what they regard as Barclays’ misdemeanors. Colourful, and attractive to attendant journalists. Not the sort of publicity Barclays would have wanted on the day of its AGM.  

Protests outside Barclays AGM, April 24 2014

This was bad enough. But once inside the hall, directors received a distinctly frosty reception from shareholders. And with reason: the bank is proposing to increase executive pay substantially while keeping dividends on the floor, even though its shareholders coughed up an additional £5.8bn not long ago to meet a capital shortfall.

Sir David Walker, Barclays’ chairman, made a valiant attempt to defend the indefensible. He insisted it was due to competition from other banks, particularly in the US, for highly skilled and qualified staff: 
"But we were faced last year, 2013, with a situation in which we were losing people who were crucial to the future of the investment bank in an extremely competitive environment in which total pay in some parts of the major US investment banks rose by 15% or more. Our resignation rate for senior employees in the US almost doubled in 2013. We saw significantly higher numbers of high quality people we wanted to recruit turning down our offers. In this situation, where there is a genuine threat to the health of the franchise, our duty of care is to protect value for shareholders. The challenge was the need for damage limitation and franchise protection."
And he told shareholders the pay increases were in their interests. Barclays had to keep up or risk losing key people.

But shareholders were unimpressed.  The life insurance company Standard Life complained that its members deserved better than the dismal returns they were getting, and that if Barclays could afford to pay its executives so much then it could also afford to remunerate shareholders properly:
".....we are unconvinced that the amount of the 2013 bonus pool was in the best interests of shareholders, particularly when we consider how the bank's profits are divided amongst employees, shareholders and ongoing investment in the business. The dividend was unchanged in the year and an additional £5.8bn of capital was raised from shareholders. We also believe that this decision has had negative repercussions on the bank's reputation."
And it then led other institutional shareholders in a public humiliation of the remuneration committee by voting against the pay deal that would have seen bonuses rise by 10%. Smaller shareholders didn’t mince their words either, one calling for the resignation of Antony Jenkins, the CEO, another calling for the resignation of the remuneration committee, and others making pithy remarks about mismanagement.

The pay deal was eventually approved by two-thirds of shareholders. But it was an uncomfortable experience for Barclays’ management. Like all executives in public companies, they are held to account by their shareholders. At this AGM, their shareholders forcefully reminded them that they cannot do as they please.

Barclays' UK Shareholders' Association, in a recent letter to Sir David Walker, complained about the proposed pay deal in the light of poor results and rubbish dividends:
"UKSA has noted the results statement put out by Barclays showing how it has performed for 2013. That statement shows, inter alia, that the profit before tax is down 32% from 2012 and that the return on shareholders’ equity has halved from 9% to 4.5%, but you have increased the bonus pool for your investment bankers by £210 million and the compensation ratio for the investment bank has gone up from 39.6% to 43.2%.
"That statement also shows that the total dividend for 2013 will be 6.5p per share. This compares with 34.0p per share paid for 2008, a reduction of 81%."
They have a point. Barclays’ performance is grim by any standards. During the AGM it issued a profits warning for its fixed income and commodities trading division, only a couple of days after rumours circulated that it was considering selling its commodities trading division. A sizeable restructuring of the FICC division – indeed possibly of the entire investment bank – now seems likely, although Jenkins wouldn’t be drawn on his plans. And to crown it all, later the same day Barclays announced that it had agreed to pay a regulatory fine of $280m for its role in the US mortgage mis-selling scandal that contributed to the 2008 financial crisis. Nor is this the only example of bad behaviour for which it is under regulatory investigation. On the face of it, it is hard to see how the executive pay rises agreed today are justified. 

But Barclays does have a problem. It is competing world-wide for talented staff whose skills are considered to be in short supply. When there are skill shortages in an industry, wages are driven inexorably upwards, particularly when contracts are fairly short-term, people do not work notice periods and there is an active recruitment industry intermediating between employers and would-be employees. All three have a vested interest in driving up wages: the employer because it believes paying generously will encourage key people to stay, the employee because he (in banking it is mostly he) believes he is worth that pay even if he has no immediate use for it, and the recruiter because his commission is determined by the pay package of the recruit. It’s not unlike the collusion that exists between the buyers and sellers of houses, together with real estate agents and mortgage lenders, to drive up prices. Everyone wins, except those who aren’t part of the game – they lose out. In the property market, the principal losers are those who can’t afford to buy and have to rent at exorbitant prices. In the senior banker recruitment market, the principal losers are shareholders, whose returns are depressed by such exorbitant pay deals.

When I was at Midland Bank in the late 1980s, we had such a pay spiral in the IT market place. The pay of people with scarce technical and business skills rocketed: contractors, in particular, were paid astronomical amounts of money to persuade them to stay (they didn’t want permanent jobs). Permanent staff were paid considerably less, but even so their pay was out of step with going rates in other parts of the bank: we had to recruit people at seniority levels far in excess of their real responsibilities just to pay them market rates.  In the end HR put their collective feet down and refused to participate in what they incorrectly termed a ”Dutch auction”. This put an end to the payment of exorbitant amounts of money to IT staff at Midland, which as Midland was desperately short of money following some very unwise investments in Latin American government debt was perhaps a good thing. Had other banks done likewise, the IT pay spiral would have been halted. But they did not – at least not then. What broke the pay spiral was the 1990s recession, which saw banks closing down IT projects and laying off staff and contractors, and – above all - the IT outsourcing trend.
The same sort of thing is happening at senior levels in banks, particularly investment banks. The EU’s bonus cap is the European equivalent of Midland Bank HR’s foot-stamping. But other parts of the world have not cooperated. Since the introduction of the EU bonus cap, American and Far Eastern banks have been able to offer far more generous performance-related pay deals than European banks. Barclays, like other banks, is finding ways round the cap – for example by raising base salaries, providing “allowances” and – particularly - paying bonuses in the form of shares. But this makes pay less flexible and less liquid, which neither the bank nor its employees really like. And it is sailing close to the wind: EU dignitaries are already complaining that such tactics breach at least the spirit of the bonus cap legislation. But at least it enables Barclays to compete for talent with the likes of Goldman Sachs. The UK's Chancellor, George Osborne, fearing that the EU bonus cap, if strictly applied, would damage banks' competitiveness and destroy London's status as a world financial centre, is preparing to issue a legal challenge to the bonus cap. Battle is joined. 

But what exactly do banks mean by “talent”? And how scarce is this "talent" in reality? Could it be that it is actually more common than bank executives realise, but they have been led to believe that talent is scarce and expensive - perhaps by headhunters looking for good commissions? This reminds me of the arguments of so-called "entrepreneurs", who argue that they deserve exorbitant rewards because of their rarity - an argument ably debunked by Chris Dillow. Anyway, should banks really be recruiting people who are principally motivated by the size and flexibility of their pay package? Are people motivated solely by money the sort of people who should be running substantial parts of what is at least to some extent a public service?

Self-reinforcing pay spirals are unsustainable, because they drain money from other important functions – including business investment, in which shareholders should be at least as interested as they are in dividends. So the real question is whether these exorbitant pay deals are really necessary. If they are not, they must be ended, in the interests of all concerned and especially the owners of the business. 

Some of Barclays’ shareholders put their collective feet down at the AGM. Although the pay deal was passed, Barclays’ management will not forget that. I admire the action taken by Barclays’ shareholders, and I hope shareholders of other large financial organisations follow suit. But it won’t be enough. Shareholders can only influence the executives of the companies whose shares they own: admittedly, big institutional shareholders such as Standard Life can influence the pay deals of more than one bank, but even they cannot influence pay deals across the entire market. It seems unlikely that shareholder resistance alone will be sufficient to end exorbitant pay deals for senior bank executives.

But regulators can influence pay deals at ALL banks.  Perhaps it is time for regulators to take more interest in recruitment practices that routinely involve offering very large pay packages. And above all, perhaps it is time for international cooperation between regulators to put an end to this pay spiral. It would be nice to think that the EU’s bonus cap would force banks to “grow their own” talent and give opportunities to people not currently in the senior banking elite. But unless regulators in other countries follow suit I fear it will be circumvented and eventually ignored by both banks and regulators. We need worldwide regulatory intervention to curb bankers' pay.  

UPDATE: RBS has just been forced to scrap plans to pay bonuses of up to 200% because UKFI says it will vote against the scheme. UKFI manages the UK Government's 81% shareholding in RBS. Amazing how effective an official shareholder with a controlling interest can be. 


  1. The analysis misses the point slightly.

    The best way to stop having exorbitant pay packages is for regulators to increase the equity of banks. At the moment Barclays is a ludicrous 3%, a leverage ratio of 33%. Many ( for example Admati/Hellwig) argue for more equity, up to 20%.

    Let us assume equity was tripled to only 9%, (which would reflect more the real risk of these businesses to the tax-payer) return on equity, on which these cloud cuckoo remunerations are based, would only be one third of what is was now.

    Even now Barclays investment banks return on equity is very, very poor compared with other FT100 companies - so these high salaries are already not really justified.

    If these return on equity returns fell to one third, (because regulatory equity needed to be tripled) many investment bank returns would be exposed to what they really are: businesses which rely on smoke and mirrors, and implied taxpayer subsidies. They would have no financial justification, and investment banking would effectively stop. That would be the end of management and investment banks employees ripping off shareholders!

    1. I did not specify what form the regulatory intervention should take, only that it should be coordinated worldwide. Raising equity capital requirements to much higher levels might indeed be one way of curbing bankers' pay, as you suggest - though that isn't its primary purpose.

    2. I think this will come soon. People really have truly had enough of banks. Now they've worked out that what looked like their cut of the pie (house price inflation) is a sham they see no use for them.

  2. Great post! I am impresed to read your blog It takes me almost half an hour to read the whole post. Definitely this one of the informative and useful post to me. Thanks for the share. you also visit my site  Rental Property Accounts There is great satisfaction in knowing we've done our job well and served our clients' interests.

  3. You wouldn't want to be high up at Barclays at the moment... I'm sure the chairs feel a little hot... A rough AGM and being voted the worst bank by consumers.. it's not looking too rosy.

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    1. They could not care less. You get in the seat, sit for as long as you can and take as much as you can then you walk. They are not there to make society better. It's like supermarket sweep.


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