Earlier this month, one of the UK’s most influential shareholder groups, the Association of British Insurers, sent a terse letter to each of the country’s five biggest banks: Barclays, HSBC, RBS, Lloyds and Standard Chartered.
In the letter, the ABI warns the chairman of each company that it wants to see the end of the “business as usual” culture in the City, and makes it clear that it would like to see pay cuts for the banks’ executive directors.
The letter points out that ABI members are “significant holders of both equity and debt” in the banks, and expresses “continuing concern with remuneration across the banking sector”.
While one might argue that the ABI is more concerned about the share its members get of the pie than anything more moral, this is far from the first time that cuts in executive pay have been called for publically. So what would be the pros and cons of reducing executive salaries?
Pros of reducing executive salaries
Good for investor and consumer confidence – Both shareholders and the public would like to see the reins pulled in on top banking executives. Shareholders take a dim view of high executive pay and generous bonuses because of dwindling dividends.
Ordinary members of the public would like to see executive pay reduced, as a way of holding to account those that they view as being responsible for the current economic crisis. Executive pay cuts could help to restore faith in the system, encouraging investment and spending.
Better balance between executive remuneration and dividends paid to shareholders – In the ABI’s letter to the banks, ABI head Otto Thoresen complains that “too much value is being delivered to [bank] employees in contrast to the dividends paid to shareholders.”
He goes on to say that “the reduction in employee pay-out ratios needs to be achieved by reducing individual remuneration pay-outs to highly paid employees, including executive directors.” The ABI believes that changing this balance will encourage further investment.
Good for banks’ public relations – Public opinion of banks is at present negative. Cutting executive pay and reining in some of the more exorbitant banker bonuses would be a vital first step in healing the rift between the banks and other elements of society.
Cons of reducing executive salaries
Risk of banks losing executive talent as a result – It has been suggested that by reducing executive pay and bonuses, banks could lose their key talent to competitors, potentially creating more problems. The ABI, however, believes that this is not currently an issue that should be considered, as “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.”
Could remove incentives for bank execs to excel and innovate – Some would argue that executives are paid large salaries in order to bring innovation to the company and to carry certain risks, and that, without favourable remuneration, banks could stagnate.
The issue remains to be resolved.
Terry Irwin is managing director of TCii Strategic and Management Consultants.
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