Barclays Braces for Revolt Over Executive Pay
Associate Editor, CNBC
Barclays could face a shareholder revolt over executive pay later Wednesday, as it was warned it would face continued scrutiny "for the foreseeable future" into the thorny issue that has gained prominence in the UK following the 2008 credit and banking crisis.
While most bank remuneration policies would have passed without much, if any, inspection in the past, many investors had now “fundamentally changed the way they approached remuneration,” Tom Powdrill, a spokesman for Pensions & Investment Research Consultants (PIRC) told CNBC.com.
“Barclays is looking the most likely to blow up this year as well as possibly HSBC and going forward it’s going to be a regular thing," Powdrill said.
“Investors that would have voted for everything that came in front of them in the past will now check remuneration packages much more carefully.
“Remuneration policy was seen as driving some of the risk-taking that got the banks into trouble so it’s obviously become a focus for shareholders,” he added.
The fact that regulators have also become involved in the process means there is a framework for shareholders to look at and so they are able to examine remuneration structure better, Powdrill explained.
The research body, which provides information for institutional investors, has already called on shareholders to block the 2010 Barclays pay deal on the basis that it is "opaque" and has an "overly complex" structure.
According to various reports in the media, shareholders are believed to be concerned over a proposed 20 percent pay hike for Barclays’ chief executive Bob Diamond, as well as the use of a new financial instrument to pay top executives at the bank.
Powdrill suggested Diamond had only himself to blame if he became the focus for shareholder anger on Wednesday.
“[He] all but let the cat out of the bag when he told the Treasury Select Committee the time for hand wringing is over,” he said.
The total pay deal for Diamond consists of a £6.5 million ($10.68 million) bonus, a conditional share award of £6.25 million and £14 million in shares vested from previous incentive plans over the last five years plus an award from 2007 that amounted to £5 million.
Diamond’s salary was raised to £1.35 million upon his promotion in January; he got a 23 percent increase on the salary of his predecessor.
Not everyone thinks the pay deal will spark a shareholder revolt.
However, shareholders are likely to ask for more reliability, Justin Urquhart-Stewart, co-founder and director of asset manager Severn Investment Management, told CNBC.com "So they will want to know what the share dividend is going to be for the next five years and how the bank is going to achieve growth as well as how executives are being remunerated, so remuneration is only one part of that,” he said.
Urquhart-Stewart also warned the banks had bigger problems to worry about.
“The European banks still have the serious task of euro restructuring and we will not be restructuring countries, like Portugal and Greece, we will be restructuring the banks. And markets are potentially ignoring that little fact for the moment,” he added.
Project Merlin – commitments on lending, bonuses and more transparency from the UK's four biggest banks - and regulation of the City in general were also larger concerns for most shareholders and the banks themselves, according to Urquhart-Stewart.
“It’s a very difficult position for everyone because the government has a very fine line to tread. If it over-regulates it won’t be a case of whether the banks up sticks and leave London but whether the next round of investment comes to London or not," he explained.
"And it will be too late before anyone notices.The banks can be quite insidious about this and simply decide to make their next investment somewhere else like Hong Kong.”
However Diamond told investors at the bank's AGM that Barclays had not spoken to overseas regulators about relocating its headquarters away from London, according to a Reuters report.
"While there has been speculation about Barclays moving headquarters, I want to assure you that Barclays has not had any discussion with US regulators or for that matter with regulators anywhere else in the world - about relocation," he said.
He added: "We will always consider what is best for our shareholders but that does not mean that we wish to move. We have been here for 320 years. This is our home," he added.
And Diamond said the bank was fully compliant with all regulatory requirements, adding its remuneration systems were designed to reward success, not failure, Dow Jones Newswires reported.
Earlier, however, the bank posted a 9 percent fall in first-quarter profit, missing forecasts, after it took a hit on the value of its own debt and income at its key investment banking arm dipped.
Diamond is planning to sell assets, reshape the bank and slash costs to boost profitability. The bank said it was on track to achieve £500 million of cost savings this year.
Barclays reported a pre-tax profit of £1.66 billion for the first quarter. The bank’s investment arm, Barclays Capital contributed underlying profit of £1.3 billion, down 15 percent on a year earlier, as top-line income came in at £3.3 billion, down from £3.8 billion a year ago.
The bank said trading in April had been in line with first quarter trends and it was content with current forecasts for 2011, which expect profits to rise to about £7 billion.
It was reported on Sunday that the Association of British Insurers (ABI), whose members control around 15 to 20 percent of the stock market has issued a so called “amber top” alert regarding the pay deal, adding to the pressure already applied by PIRC.
The alert is not the first time the ABI has intervened in pay deals within the banking sector.
It issued a similar alert last year ahead of HSBC’s AGM and is known to be in discussion with that bank’s senior executives about this year’s remuneration proposals.
Shareholders were reported by theGuardian to have three main areas of concern regarding the Barclays pay proposals.
The first is the bank’s plan to use contingent convertible bonds - also known as "cocos" - to pay its key bankers, traders and executives as a form of payment along with shares and cash.
The new type of financial instrument can convert into equity during times of severe stress and they have been issued by a handful of banks to raise fresh capital from investors but never used to pay staff.
The cocos would pay seven percent annually, which shareholders feel is far too generous.
There is also concern at a proposed pay rise for Diamond, who only took over as chief executive of Barclays in January, compared with that of his predecessor John Varley, while changes to the performance criteria used for long-term incentive plans have also created worries.
The total remuneration package for the Barclays chief executive comes to around £27 million.
Barclays paid £653 million in shareholder dividends, but this was dwarfed by the £11.9 billion in staff costs for 2010, up 20 percent from £9.9 billion the year before, including bonuses, referred to as performance costs of £3.5 billion.