Barclays' Pay Reform Continues To Disappoint

Barclays Canary Wharf

It's a triumph. Pay at the top of Barclays is plunging, just as the directors always said it would. Look, only 428 staff earned more than £1m last year; that's down from 473 a year ago.

And the numbers in the £5m-plus bracket are collapsing. There used to be 17 in this exclusive club and now there's only five. Remarkable. The Go-To bank, as Barclays styles itself these days, is going to work on the pay front.

Not impressed? Nor should you be. It is now five years since the start of the banking crisis and four years since the survivors assured us that pay levels in the industry would fall dramatically because, in an age of higher capital thresholds and lower leverage, profits would be harder to generate and shareholders would expect reform.

The prediction about profits was accurate. Barclays ranks as a relative outperformer but its return on shareholders' equity – a pure measure of profits – was only 7.8% last year. The compares to a cost of shareholders' equity that the bank puts at 11.5%. In effect, Barclays failed to earn its keep last year, which has been the case for several years now. That's the backdrop against which to measure the pace of Barclays' overhaul of pay. It is astonishingly slow.

"We must ensure we pay no more than necessary to achieve Barclays' objectives," declares Sir John Sunderland, chair of the pay committee, in this year's annual report, claiming the bank is taking a "different approach". In fact, his words sound like an echo of those of former chairman Sir Marcus Agius, who used to claim that "we pay as little as we can get away with".

To be fair to Barclays' new-broom board, under chief executive Antony Jenkins, a few points should be acknowledged. First, Barclays is by no means the worst bank in dragging its feet. There is a table in the report showing that Barclays' pay, measured as a percentage of operating profit, is well below the average of its peers.

Second, the rewards in investment banking will always look rich to the outside world. Third, Barclays is not claiming to have completed its overhaul of pay, stating only that it is "on a journey" to a point where shareholders collect a fairer share of the spoils.

But the journey, for Barclays and its rivals, is taking place in the slow lane. What does a "multi-year" adjustment to "compensation costs" to benefit shareholders, as Sunderland puts it, mean? If it implies another three years to put the house in order, the destination will be reached eight years after crisis struck.

In no other industry would poorly-treated investors tolerate such tardiness. The heist is less extreme than in the past, but it's still a heist.

How do you solve a problem like RBS?

Would our troubles be over if Royal Bank of Scotland were broken up into a good bank and bad bank? That was the course of action the governor of the Bank of England advised this week. The advantage, supposedly, is that the good bank could be returned to the private sector in short order and we'd all gain from having "a healthy RBS back lending to the economy".

Well, okay, 100% nationalisation of RBS followed by a rapid restructuring was an interesting idea at the outset. But the reasons behind Alistair Darling's rejection of full nationalisation in early 2009 still sound solid.

The former chancellor wrote in his autobiography: "Our gross domestic product (GDP) at that time amounted to about £1.5tn. RBS liabilities were thought to be £1.9tn. What would happen if not only did we have to take on RBS but things got worse and we were required to nationalise Lloyds HBOS, or even Barclays?"

Indeed. The UK in 2009 was not in the same position as Sweden in the early 1990s, where a good bank/bad bank manoeuvre worked wonders. Our banks were colossal relative to the size of the economy and a global recession was running. It was a risk too far.

How about splitting up RBS now? It would clearly be safe to do so, and the £8bn-ish expense of buying out minority shareholders is irrelevant in the context of the national debt and the £375bn programme of quantitative easing. But would there be a real gain? RBS' bad assets have mostly been unwound (£200bn gone, £60bn to go) and a split would take at least a year to organise. In the interim, RBS's lending in the UK might even shrink.

None of which is to deny that institutional apathy on lending to small businesses, established in the boom years, runs deep. But, come on, there are other reasons behind the soggy numbers. Project Merlin, the government's first attempt to improve the flow of credit, was utterly feeble. Lack of competition between banks, which the government has shown no appetite to address, is another.

And quantitative easing, we can now see, benefits those who don't need loans, like owners of portfolios of shares or large houses in central London. Higher wages, an ingredient that might boost demand in the economy and thus help to stimulate lending, are missing. Re-jigging RBS at this late stage doesn't feel like an answer to any of the big problems.

John Lewis likely to beat M&S to £10bn a year sales?

"They fish in a smaller pond and a slightly more exclusive pond. They don't compete, head to head, with Tesco and Asda on things like men's underpants."

Sir Stuart Rose, former boss of Marks & Spencer, made that lofty comment about John Lewis in January 2008. Half a decade ago it was indeed possible to regard the two businesses as fishing in pools of different sizes. In terms of annual sales in the UK, the gap between M&S and John Lewis was £2.25bn. Surely that wouldn't be closed in a hurry.

Well, it has been – almost. Amid the hoopla generated by John Lewis's bumper bonus pot for staff this week, the 9% rise in the group's revenues for 2012-13 was almost overlooked. The partners took in £8.46bn. On M&S's current form in the UK (a miserable 0.6% rise in UK retail revenues at the half-year stage), the gap will close to about £0.5bn.

An unfair comparison? Not really. The two businesses are very alike. They have a roughly even split between food and non-food sales. True, John Lewis is still smaller in the underpants department and has a broader span of non-food lines; then again, managements are free to adapt, as John Lewis did, getting fast into internet retailing.

As M&S shareholders scratch around for an explanation for the company's stagnation, one part of the answer seems straightforward: John Lewis is eating part of its lunch. Which of them will be first to reach the landmark of £10bn of annual revenues in the UK? You'd bet on the partners.

Powered by article was written by Nils Pratley, for The Guardian on Friday 8th March 2013 17.41 Europe/London © Guardian News and Media Limited 2010


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