Yesterday afternoon, Barclays announced that, after pressure from shareholders, it would be radically restructuring CEO Bob Diamond's pay package.
Diamond had been in line to receive a bonus of £2.7m for 2011, deferred in payment over three years. But when the details of his remuneration, as well as that of his colleague Chris Lucas, the bank's finance director, were published on 9 March, shareholders took umbrage. The Association of British Insurers announced two weeks ago that it was placing an "amber top" warning over the vote to confirm the pay package, advising members to think carefully about whether the policy was in the company's best interests.
The ABI is an influential voice, and the companies it represents hold around 17 per cent of the British stock market, so Barclays was clearly spooked by its recommendation. Attempting to stave off a potential revolt, the bank confirmed that it would be adding further conditions Diamond and Lucas' bonuses.
The pair will now only receive the second half of their pay if Barclays' return on equity exceeds its cost of equity. Last year, the bank's return on equity was down to 6.6 per cent, while its cost of equity was 11.5 per cent, so Diamond has some way to go.
Although this change brings Diamond's incentives more in line with his shareholders, it is a mixed blessing for campaigners against high pay. One of the strongest arguments against large bonuses like Diamond's is that they encourage the sort of risky short-termism which led to the financial crash; yet by making £1.35m of his income contingent on short-term profitability, Barclays has conceivably motivated him to do just that.
A similar story happened in New York on Tuesday, when the shareholders of Citigroup voted down a pay packet that would have given tens of millions to the senior executives of the company. The vote was a new measure introduced as part of the wide-ranging Dodd-Frank financial reforms, which requires firms to let shareholders hold non-binding votes on executive pay. As the New York Times reports, the proposed pay for chief executive Vikram Pandit was, on the face of it, rather objectionable:
Last year, the Citigroup board paid Mr. Pandit almost $15 million, plus one-time retention awards with a potential value of $34 million, as calculated by I.S.S. The proxy advisory firm recommended against Mr. Pandit’s package because parts of his awarded pay were not based on Citigroup’s financial performance, Citigroup stock had declined by more than 90 percent in the last five years and Mr. Pandit’s pay package was not in alignment with that of his peers.
Citigroup in part defended this pay package by arguing that Mr. Pandit had not received a meaningful salary for the three previous years, being paid only a dollar a year. This was nice of Mr. Pandit, but it must be put against the fact that Citigroup paid about $800 million to acquire Mr. Pandit’s hedge fund, Old Lane, an investment that Citigroup subsequently wrote off completely. And Mr. Pandit received an $80 million payment from Citigroup last year as part of the Old Lane buyout. He’s not about to become part of the 99 percent anytime soon.
Whether or not this is a chance confluence of stories or the beginning of a growing trend remains to be seen, but with growing acceptance on both sides of the Atlantic that disproportionate executive pay is a problem, it could be the latter.