‘Well done, old chap. You’ve met all your targets and are being awarded a bonus. Small problem, though. We won’t give it to you till you’re 65.’ In a attempt to appease shareholders in the wake of Diamondgate, the Barclays board is considering new plans that will force the bank’s employees to wait until they retire to cash in on their bonus payments.
This is one of a few reforms being mulled over by the bank this week. The ‘payment upon retirement’ scheme is the most radical suggestion; others include deferring bonuses for five years, or introducing downside targets, where bonuses have to be returned if targets are missed.
Barclays needs to do some serious damage control if it wants to prevent a full-scale shareholder revolt. Last year, then CEO Bob Diamond was awarded a £17.7m pay package, despite opposition from over a quarter of the bank’s shareholders. Adding insult to injury, Diamond – one of the highest paid execs in the UK banking industry – then left Barclays in disgrace earlier this year following revelations of Libor-fixing at the bank. Despite the black cloud over his departure, the former chief will still earn £2m a year in lieu of a pension.
Barclays isn’t the only bank concerned about performance-based remuneration. Last year, HSBC introduced a new system that capped annual bonuses for senior execs at three times basic salary. Long-term share awards were also decreased from seven times salary to six. Like Barclays’ planned reforms, bonuses are rolled over annually at the bank, and collected when staff leave. This delayed financial gratification is believed to foster greater commitment to the long-term health of a company, and lets the bank earn interest on the bonus pot until pay-out. Win win.
But how might Barclays’ staff react to a similar deferred bonus framework? Could these reforms prompt a mass exodus? They may not find any better deals out there. The likehood, after all, is that the other major banks will soon follow Barclays’ suit – it will take collective action to restore the tarnished reputation of the UK financial sector, after all.
The reason that bonuses exist is to incentivise people to behave in a certain way. To do that they have to operate over a reasonable timescale. Will twenty-something year-old hot shots be happy to wait three or four years to get their mitts on a new 12C McLaren Spider? Maybe. Wait until retirement, by which time the bank could have gone bust, or legislation changed? Probably not.
The winds of change are blowing through UK banking. But before the nation breathes a sigh of relief, let’s remember that the Libor-fixing scandal still rages on. Something is rotten in UK finance, and it’ll take more than a few tweaks to bonus schemes sort out the whole mess.
Still, baby steps…