Fundamental shift required in bankers pay

6 December 2011

Text of the letter from Otto Thoresen to all UK listed banks

I have been asked to write on behalf of members of the ABI Investment Committee, who are significant holders of both equity and debt in your Company. We are writing to all UK listed Banks to outline our continuing concern with remuneration across the banking sector. We recognise that each UK bank has different characteristics, in terms of business focus, geographical reach and performance but our members believe that there is a need for all banks to fundamentally restructure their remuneration practices.

We outline below four issues; two relate to the structure of bank remuneration and two reflect issues from the ABI Principles of Remuneration which our members consider are particularly important to draw to your attention given the current environment.

As bank remuneration is currently structured, our members are concerned about the level of returns that shareholders receive compared to the returns given to employees. Members believe that in recent years this balance has been inequitable, with too much value being delivered to employees in contrast to the dividends paid to shareholders. The reduction in employee pay-out ratios needs to be achieved by reducing individual remuneration pay-outs to highly paid employees, including Executive Directors, and not by just reducing employee numbers. Our members believe this year is the time to make these changes. Very few banks are recruiting and most are reducing employee numbers. Given this lack of competition for staff, our members believe that the retention risk is now reduced.

The second structural issue relates to the need to retain capital to meet current and future regulatory capital ratio requirements. When making decisions on the employee pay-out ratio our members obviously wish the Board to be mindful of the need to retain capital. Any capital retention should not be solely funded by a reduced payment of dividends.

The members have asked us to draw to your attention the following two aspects of our Principles of Remuneration. The first recognises the significant share price falls across the banking sector this year. Windfall gains may arise if the level of share or option grants expressed as a multiple of salary is maintained after a substantial fall in the share price. Where this happens long term incentive grants must be scaled back.

The second relates to the use of discretion by the Remuneration Committee. The banking sector has experienced a number of significant events during the financial year, including PPI settlements and the Sovereign debt crisis. These events have had a considerable impact on the banking sector’s profitability. There have also been questions over the portrayal of financial positions and performance given the prevailing accounting standards. Remuneration Committees should not use discretion to increase bonus or other incentive payments because of “events outside the management’s control”. Boards should be mindful of the adverse impact these events have had on the returns to shareholders and of maintaining a meaningful link between pay and bottom line performance.

We encourage Remuneration Committees to establish clear risk underpins to variable remuneration. These should 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. Overall, we believe that fundamental shifts in remuneration practice should help to address the sustainability and attractiveness of the business model to investors and hence improve shareholder returns. Given the level of equity employees are now required to hold, this improvement in shareholder value will have a direct impact on the returns to employees.

In conclusion, it is our members’ view that it can no longer be business as usual for this remuneration round. They expect to see significantly lower bonus pools and individual awards given the current market circumstances. It is essential that all Banks take, and are seen to take, a responsible approach. The ABI is willing to facilitate engagement with your major shareholders.

Yours sincerely

Otto Thoresen
Director General

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