ABI: dividend should come before bonus

A MAJOR shareholder group has slammed banks for letting executive pay get out of sync with results, in a sign of growing investor activism over the hot button issue of banker bonuses.

The Association of British Insurers (ABI), whose members own some 15 per cent of FTSE 100 stock, has sent a letter to the boards of the UK’s five biggest banks calling “for all banks to fundamentally restructure their remuneration practices”.

“It can no longer be business as usual for this remuneration round,” writes ABI chief Otto Thoresen. “[Our members] expect to see significantly lower bonus pools and individual awards given the current market circumstances.”

He adds that there is no longer “a meaningful link between pay and bottom line performance”.

In particular, Thoresen complains that banks prioritise bonuses over dividends when it comes to cutting costs, “with too much value being delivered to employees in contrast to the dividends paid to shareholders”.

Given lenders’ dismal share price performance and mass lay-offs of investment bankers, he suggests that now is the time to redress an “inequitable” balance between pay and shareholder rewards.

“Given this lack of competition for staff, our members believe that the retention risk is now reduced,” Thoresen writes.

The letter is evidence of growing disquiet among bank investors over the eroding value of their stock.

It will bolster political efforts to shift the balance of power towards shareholders in deciding on bankers’ pay. But depending on the outcome of the ABI’s discussions with banks, it could undermine arguments for a statutory pay crackdown above and beyond shareholder intervention.

Thoresen also wades into the argument over lenders’ accounting practices. “There have also been questions over the portrayal of financial positions and performance,” he writes, implying that banks should reconsider their methods.