To the surprise of almost nobody, the banks want to get around the EU's bonus cap. And, to the surprise of even fewer, Barclays is at the head of the pack. The solution? Pay rises all round.
This moment was coming, of course. As argued here all along, the EU legislators underestimated their foe if they thought big banks would accept meekly a rule that bonuses should be capped at two times salary. Banks, when pay is at stake, do not react meekly. It was entirely predictable that they would seek to boost pay to compensate (as it will be described) senior staff for the loss of bonus-earning potential.
Barclays has dreamed up a wheeze whereby it would hand over a supplementary, but non-pensionable, monthly payment to staff. An individual's bonus would be based on the original salary; the supplementary payment would just be in lieu of an even bigger bonus.
However this idea is dressed up for public consumption, the principle is clear: banks want to meet bonus restrictions with pay increases.
The development demonstrates two things. First, the naivety of the EU parliamentarians. They correctly diagnosed that skewed and outsized incentives helped to fuel the financial crisis by encouraging dumb risk-taking. But their prescription was flawed. Trying to make banks safer by capping bonuses was never going to work.
As Andrew Bailey, the head of the Bank of England's Prudential Regulation Authority, put it in March: "Once you give more fixed pay you cannot get it back. What we have been pushing for is for banks to use shares or other non-cash bonuses that can be clawed back if something goes wrong."
The UK authorities, barring a successful appeal against the EU reform, seem to have lost the argument. That is a shame. Yes, it is true that a 200% bonus would rightly be regarded as absurdly over-the-top in most walks of life. But HSBC's highest earner last year collected a £635,000 salary and a bonus of £6.3m. Banks were never going to tell an individual in that position to take the bonus cap on the chin. The EU should have been more worldly.
All the same, for Barclays to lead the charge in arguing for higher salaries takes the breath away. This is a bank that has just whacked its shareholders with a £5.8bn rights issue to raise capital that could have been saved by paying lower bonuses in past years.
Barclays, albeit no RBS, is also a bank that has consistently failed to earn returns on equity greater than the cost of equity – the purest measure of whether a bank is earning its keep. Last year's outcome was returns of 7.8% versus an estimated cost of equity of 11.5%. The chief executive, Antony Jenkins, hopes the figures will meet some time in 2015.
In the circumstances, Barclays' shareholders should respond to the bleat for higher salaries with extreme scepticism. OK, to honour the principle that management should be allowed to manage, maybe a few quid could be reserved for truly exceptional cases.
But the central message should be this: shareholders should tell Jenkins they are heartily sick of wishy-washy claims by Sir John Sunderland, the head of the pay committee, that Barclays is "on a journey" to a point where investors get a fairer share of the spoils.
The top brass, if they want a pay rise, should be told to come back when they can demonstrate that Barclays is run in the interests of its shareholders and customers rather than its senior staff.
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