Inside Track: The EU’s rules to cap bankers’ bonuses aren’t working

Mark Kleinman
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CREATE a loophole and bankers will leap through it quicker than you can say “deferred compensation”: that seems to be one of the axioms of the aftermath of the financial crisis.

Examine the consequences of the European Commission’s cap on the multiple of salaries that banks can dish out in variable pay, though, and the reality is more nuanced.

Take, for example, HSBC’s plan to introduce share awards for around one thousand senior staff, a move it believes is necessary to avoid a damaging Asian exodus of staff to rivals not fettered by the cap.

Under the proposals, the bank will augment base pay with sums paid every three months in stock that would have to be held for five years before vesting.

Assuming HSBC wins the approval of its shareholders at this year’s annual meeting – and there’s no reason to suppose that it won’t – it would be able to pay up to twice as much as the combined value of the salaries and share allowances in bonuses.

That’s all very well until you consider that because the share awards are part of fixed pay, they won’t be subject to clawback provisions. In other words, a smaller proportion of the pay of top HSBC staff will now be subject to retrieval by the bank in the event of another Mexican money-laundering scandal or ill-fated Household-style takeover.

It’s safe to say that Stuart Gulliver, HSBC’s chief executive, isn’t planning on either of those eventualities.

Neither are any of his counterparts, many of whom are to opt for straight cash ‘allowances’ rather than share awards, and in so doing dispensing with even the veneer of aligning employees’ interests more closely with those of investors.

The point of Brussels’ new rules was both to make pay less egregious and easier to justify to the owners of banks.

Right now, they look like doing neither.

If UK companies are as ripe for targeting by activists as many assume, then picking off Wm Morrison must be akin to the proverbial shooting of fish in a barrel.

That was the obvious conclusion to draw from the news that Elliott Associates, the US hedge fund, has built a stake in the Yorkshire-based grocer.

Its mediocre Christmas trading has certainly left it vulnerable to criticisms of its price and product positioning as it contends with the buying power of Tesco, the stellar performance of Waitrose and the deep discounting of Aldi and Lidl.

Elliott’s investment angle appears to be more narrowly focused, however, on extracting value from Morrison's property portfolio.

Indeed, I understand that the hedge fund has been a holder of the supermarket’s shares for nearly a year, and also holds stakes in J Sainsbury and Tesco.

Unlocking three of the largest real estate holdings in the UK may prove a rich seam for Elliott to mine.

Jupiter Asset Management looks like delivering a decent send-off for Edward Bonham Carter, who steps down as chief executive in March.

Yesterday’s pre-close update saw strong inflows that were almost twice analysts’ estimates at more than £500m.

A sale of its private clients business is also on the cards. Well-placed sources tell me that the three remaining bidders for the division are Brown Shipley, now part of KBL, Close Brothers Asset Management, and Rathbones.

Quilter Cheviot Investment Management, backed by the private equity house Bridgepoint, is not in the auction, but is firmly on the acquisition trail. Expect more takeover action in the sector soon.

Mark Kleinman is the City editor of SkyNews @MarkKleinmanSky