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Posts Tagged ‘Executive pay and bonuses’

Citigroup bonus prompts pay row

July 26th, 2009 | No Comments

Andrew Hall, head of Phibro, is at the centre of a dispute between Citigroup and US pay tsar Kenneth Feinberg who wants to curb bonuses that increase the risk taking activities of banks

A British oil trader in line for a $100m (£60m) bonus is expected to pitch his employer Citigroup into direct conflict with the US treasury after a clampdown on excessive pay by the Obama administration.

Andrew Hall, an art-loving eccentric who owns a Connecticut mansion and 1,000-year-old castle in Germany, is at the centre of a dispute between the New York-based bank and the government pay tsar Kenneth Feinberg, who wants to limit rewards that increase the risk-taking activities of major banks.

Citigroup wants to protect the pay of its top-performing staff to prevent them defecting to rivals that have fared better in the banking crisis and can pay bigger rewards to traders.

Hall is considered a top trader after his Phibro energy trading unit bet that oil prices would rise from a low of $20 to $30 a barrel in the early part of the decade.

In April, following its $45bn bailout, Citigroup asked the treasury to exempt Phibro from an investigation into excessive bonuses.

Phibro is a secretive outfit, which in recent years has accounted for a substantial chunk of Citigroup’s profits. Little is known about Hall other than that he was an Oxford chemistry graduate who started work at BP before moving into oil trading for Salomon Brothers. After early gains, he lost $100m in the first Gulf war when oil prices plunged, but bounced back and became a multimillionaire and the boss of Phibro in the 1990s.

He is credited with buying every available oil futures contract in 2003, when they were priced on the basis that crude prices would remain stable. Over the next few years the demand for oil surged and prices soared to more than $150 a barrel, making Hall and Salomon Brothers owner Citigroup hundreds of millions of dollars.

It is understood Hall is in line for a $100m payout this year.

Citigroup, which has lost $30bn over the past year and seen many of its top-rated traders defect to rival banks, is keen to maintain one of its few profitable revenue streams while it stabilises its finances and seeks to escape government ownership.

However, bonus payments have brought criticism from members of Congress and the public. The Obama administration has blamed bonus packages for encouraging the risk-taking that pushed the financial services sector into chaos last year.

Feinberg, a lawyer, was selected by Tim Geithner, the US treasury secretary, to assess bonus awards at the seven banks receiving the most bailout aid, including Citi. He can reject pay plans he believes excessive and review compensation for the firms’ top 100 salaried employees.

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FSA considers sanction moves

July 24th, 2009 | No Comments

• Advisers who help their customers pay less tax could be fined or struck off under watchdog’s new code of conduct
• FSA chief defends regulator’s record during recent crisis and says its culture has been transformed

Bank bosses who allow their firms to devise schemes to help customers avoid paying tax could face sanctions from the Financial Services Authority.

The City regulator is considering its position on the government’s new code of conduct on tax after Nigel Harper, banking adviser at HM Revenue & Customs, took the unusual decision of raising the matter the regulator’s annual public meeting today.

The code, which is out for consultation, is intended to be voluntary and is designed to save the taxpayer billions of pounds lost through complex but legal avoidance schemes operated by some banks.

The government has already said bank that refuse to sign up or act against the “spirit” of the current tax laws will be subjected to heavier scrutiny from HMRC.

Until today the FSA’s involvement had been unclear. Harper told the packed meeting in the City that he was particularly referring to the structured finance operations of banks, which often specialise in tax planning, when he asked whether individuals employed by banks not signing up to the code would still be considered “fit and proper” under the FSA’s rules.

The FSA authorises people to work in the City on the basis that they are “fit and proper”. It has the power to strike individuals off the register or fine them.

Hector Sants, chief executive of the FSA, said the topic was likely be included in a consultation on the FSA’s “fit and proper” test, which is expected in the autumn.

The FSA has not yet reached any conclusions on how it will handle the voluntary code. Sants said: “I’m sure [the consultation] will pick up on HMRC codes and any other codes”.

Lord Turner, the FSA chairman, said: “The whole overlap between tax and regulatory arbitrage and the fit and proper test is one we are still thinking about.” Turner also said the regulator was encouraging banks to have simpler operational structures, noting that international banks had “extremely complicated legal structures”. “It is a very complicated area. We are not a tax enforcement agency,” he said.

HMRC also noted that the FSA did not have tax enforcement powers and was forced to stress that Harper was attending the meeting in a personal rather than professional capacity.

“HMRC already has very good relations with the FSA, we talk about a range of issues of mutual interest, including the code of practice on taxation for banks,” HMRC said.

Turner warned that the uncertainty surrounding the future of the regulator, created by Gordon Brown when he was chancellor, was affecting recruitment and the implementation of changes that were needed after the worst financial crisis since the Great Depression. The shadow chancellor, George Osborne, announced on Monday he would disband the FSA and give more powers on bank regulation to the Bank of England.

“It would be idiotic to deny that uncertainty is a complicating factor. It is a challenge for us to maintain focus on what really matters,” Turner said.

Sants insisted the FSA, after embarking on a more intensive approach to regulation, was “fit for purpose”. Turner added: “I don’t think any other magical organisation out there can do better.”

The chairman has warned the Conservatives how difficult it would be to implement the handover to the Bank of England.

Turner said banks could in some instances be required to hold up “three or five or six times” more capital than they do now to underpin their riskier businesses.

He said the City was only slowly realising the extent of extra capital it might need, citing research by JP Morgan this week which suggested Barclays might need £12.8bn and RBS £8.5bn to meet new rules.

Turner also admitted that the capital requirements might be delayed in some instances because of the recession – a time when banks might ordinarily be allowed to eat into surplus capital.

Sants was forced to defend the FSA’s decision to pay out bonuses to its staff this year. He said: “The marketplace we are hiring from and at risk of being recruited into is highly competitive.”

The FSA has begun interviewing boardroom candidates at banks since the crisis, not only to test their probity but also their competency. Sally Dewar, managing director of wholesale regulation at the FSA, said: “We have seen several potential non-executives withdraw their applications.”

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MPs to investigate sexism in the City

July 22nd, 2009 | No Comments

• Inquiry triggered by banking sector collapse
• Select committee includes just one female member

Sexism in the City and pay inequalities faced by women working in financial firms are to be investigated by the Treasury select committee of MPs as part of its attempt to prevent another financial crisis.

The committee, which includes just one woman, is calling for evidence on the role of women in the City and information about the proportion of women occupying senior positions in leading financial firms.

John McFall, chairman of the committee, intends to hold two hearings in the autumn. The investigation has been born out of the committee’s work looking into the banking meltdown.

The government is expected to respond to the 45 conclusions reached by the committee following its high-profile hearings into the banking crisis. Among the conclusions were that the review of the future of regulation by the Financial Services Authority chairman, Lord Turner, was too complacent about the role of City pay in the current crisis.

The committee had faced some criticism for calling mostly male witnesses to the banking crisis hearings when former Royal Bank of Scotland chief executive Sir Fred Goodwin gave evidence along with other key players in the events that led to the taxpayer bailouts last year.

McFall said: “At a time when pay and corporate governance are key issues in terms of redrawing financial regulation, the committee feels it is important to highlight the issue of gender equality in the financial services industry.”

“We hope our inquiry will provoke an important debate about the representation and treatment of women in the City,” he said.

The only woman on the committee is the Labour MP for Northampton North, Sally Keeble, although McFall, as chairman, has no influence over its composition. In the past the committee has included up to three women.

The inquiry wants to look at pay inequality, flexible working practices and the extent to which the culture of the City is sexist, as well as the prevalence of sexual harassment and exploitation.

Ros Altmann, an independent pensions expert, said: “There is so much of an old boy network. Men find it hard to accept [change]. Anyone looking at this dispassionately couldn’t help but be struck by the over-representation of men in financial decision-making.”

She is among those questioning whether a greater involvement of women before the banking crisis might have led to a different outcome. There might have been a “less macho culture” and more focus on long-term considerations rather than a focus on short-term gain, she said.

“It is certainly long overdue for the male domination to be challenged and this mindset that the best in the City and the financial markets are men,” said Altmann.

Ruth Lea, economic advisor at Arbuthnot Bank, was sceptical. “I don’t think this is necessary. I know women who work in the City and do fantastically well. It’s about lifestyle choices. It’s not an easy life. It’s exhausting,” said Lea.

The financial crisis has prompted a number of investigations into corporate governance and also the behaviour of the bankers, particularly after Iceland appointed two women to clean up two of its most troubled banks in October.

Researchers at Cambridge University have found that testosterone levels among City traders were higher on days when they made more than their average profit. French business school Ceram has asked if women are the “antidote” to the global financial crisis. Its study found that the fewer female managers a company had, the more its share price had dropped since the beginning of last year.

Of the French banks, BNP-Paribas has best resisted the crisis. Almost 40% of its managers are women and its shares fell by a relatively small 20%. By comparison, Crédit Agricole, where 16% of managers are women, saw its stock fall by 50%.

The committee is calling for evidence by 10 September.

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FSA threat to stop bonus guarantees

July 20th, 2009 | No Comments

Chief executive, Hector Sants reminds City firms that the regulator is determined to curb excessive pay policies to ensure effective risk management in the sector

City firms are being warned that guaranteeing bonuses for more than 12 months could encourage traders to take too much risk and breach the Financial Services Authority’s new code on remuneration.

Any guarantees made after 18 March, when the FSA published its consultation paper on pay deals, will have to be revoked if firms are to comply with the City regulator’s new code when it comes into force.

But the FSA admitted that the code, which was prompted by the taxpayer bailouts of the banking system last October and the asset protection scheme in January, will not come into effect until January – two months later than planned. The code is likely to be endorsed by the regulator’s board “shortly”, however.

In a letter to the bosses of Britain’s banks, FSA chief executive Hector Sants demands that firms send their remuneration policies to the regulator by the end of October so that their compliance with the code can be measured.

The 10 principles on pay in the FSA’s consultation paper would require firms to “establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management”.

The regulator initially targeted pay alone but has widened its aim to wages, bonuses, long-term incentive plans, share options, hiring bonuses, severance packages and pension arrangements.

Sants tells the bank chief executives: “Although our board still needs to make a final determination, we envisage the FSA may adopt a rule along the lines originally proposed, together with updated supporting principles that take account of consultation responses, and that this will be effective from 1 January 2010.”

He adds: “In particular, I would draw your attention to the fact that guaranteed bonuses which run for a period of more than one year may be inconsistent with effective risk management.”

The new FSA regime will apply to any pay deal signed after its consultation began.

Sants said: “We are not proposing to extend ‘grandfathering’ arrangements to obligations entered into after publication of our consultation paper.”

Also, Sants warns: “It is essential that the market should not revert to remuneration practices that would be incompatible with our intended outcomes if the rule and code becomes effective next year.”

The FSA is planning to incorporate the code into its handbook, which allows it to levy fines for any lapses.

Sants, one of the first City figures to link the way bankers were paid with the onset of the financial crisis, reminds firms of the FSA’s “determination” to ensure that bankers’ remuneration does not promote excessive risk-taking.

Bonuses and the way the City pays its employees have been the subject of much debate since the credit crunch began to expose big pay cheques that were handed over for generating big profits that had quickly turned to enormous losses.

Sir David Walker’s report on bank pay, published last week, recommended that the remuneration of hundreds of bankers who received more than their bosses in the boardroom should be published.

The bankers would be allowed anonymity, however.

Walker also recommended that bonuses be delayed for between three and five years and put under scrutiny by a beefed-up remuneration committee.

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Bankers could be forced to reveal pay

July 16th, 2009 | No Comments

Hundreds of City high-flyers could have their remuneration details published – but opposition MPs are critical

Plans to reveal the pay and bonuses of City high flyers in a new voluntary code came under attack from opposition MPs, who said the guidelines would be ignored unless they were enshrined in regulation and policed by the main financial watchdog.

A government-backed review recommended that some of the best-paid bank staff, who are currently shielded from scrutiny, should be included in annual reports as part of a wide range of measures designed to discourage risky behaviour.

The review by former investment bank boss Sir David Walker argued that exposing pay structures for highly paid staff in the City and putting an end to short-term bonuses would help prevent a repeat of the financial crisis.

Bonuses would be delayed for between three and five years and put under scrutiny by a beefed-up remuneration committee. Non-executive directors of finance companies would be required to spend more time assessing deals put forward by executive directors, Walker said.

But the report’s reliance on non-executive directors and shareholders to monitor a voluntary code was branded “inadequate” by Liberal Democrat treasury spokesman Vince Cable, who said banks should be instructed to observe the new rules by the Financial Services Authority.

Cable said: “It is clear that in banks like RBS the demigod status granted to Fred Goodwin prevented any form of credible scrutiny. So the news that bank boards may be forced to show that they can challenge a chief executive is a belated but welcome step in the right direction. But if the Walker approach is to have any value then it has to be obligatory through the FSA and not just on a voluntary basis.”

Sources close to several banks said there was a general acceptance that the Walker rules would be endorsed by the government in time for details of staff pay to appear in next year’s annual reports. According to City sources, one high street bank paid more than 200 staff more than its chief executive. Walker said he wanted the rules to apply to all banks operating in the City, including the largest US banks.

The review will reach chancellor Alistair Darling at a time when several banks have begun setting aside massive bonuses. Goldman Sachs and JP Morgan have reported record profits for the first half of the year.

Several MPs, already concerned at the massive taxpayer funds used to bail out Royal Bank of Scotland and Lloyds Banking Group, have signed an early day motion signalling their concern at the return of huge bonuses at City institutions.

Independent MP Dai Davies sponsored the motion, which urged a rethink at Goldman Sachs. The Wall Street bank could be in a position to offer total pay and bonuses of more than $22bn (£13.3bn), equating to an average payout of $770,000 to each of its 29,400 employees. The motion said it believes “such obscene profits are made by encouraging the very reckless risk-taking that brought down or severely damaged several major banks, and run counter to the restraint urged by the chancellor.”

Goldman, RBS and other banks operating in the UK argue they have overhauled their bonus structures with a greater emphasis on long-term rewards, but continue to face criticism that both the size and structure of their bonuses encourages risky behaviour.

Walker said the pay of individual staff below board level who earn large sums would be revealed in the form of pay bands in the annual report, though names would be kept secret. The remuneration committee would have the power to overrule the board if it believed the level of pay or bonuses encouraged risky behaviour.

He also said the role of non-executive directors should be strengthened to make up for the failures of banks prior to the credit crisis. A risk committee at board level would also oversee the policies of the bank and assess whether they could undermine its strength.

Walker said: “These proposals are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment. If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance.”

His proposals include:

• Board-level risk committees chaired by a non-executive director.

• Risk committees to have power to scrutinise, and if necessary block, big transactions.

• More power for remuneration committees to scrutinise company-wide pay.

• Remuneration committees to oversee pay of highly paid executives not on the board.

• Significant deferred element in bonus schemes for all highly paid executives.

• Increased public disclosure about the pay of such executives.

• Chair of remuneration committee to face re-election if his or her report gets less than 75% approval.

Walker said that while shareholders largely encouraged risk-taking by banks, they would need to take in the future a more active role in restraining banks such activity.

“Failures in governance in banks and other financial institutions made the financial crisis much worse. Many boards inadequately understood the type and scale of risks they were running and failed to hold the executive to high standards of sustainable performance. Bonus schemes contributed to excessive risk-taking by rewarding short-term performance. And shareholders failed to exercise proper stewardship,” he said.

“Taken alongside the arrangements being proposed by the FSA, the recommendations on remuneration are as tough or tougher than anything to be found elsewhere in the world. An important and urgent challenge is to promote adoption of similar approaches internationally.

“These recommendations should bring substantial improvement in the governance of banks. They will not guarantee that failure will be avoided in future but will greatly mitigate the risk.”

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M&S investors attack Rose’s dual role

July 8th, 2009 | No Comments

• Activist rebellion expected at annual meeting
• Up to half of shareholders may oppose chairmanship

Marks & Spencer boss Sir Stuart Rose is braced for up to 50% of shareholders to support a proposal calling on him to stand down as chairman within a year.

He faces a showdown with M&S’s private and institutional shareholders at the retailer’s annual general meeting at the Royal Festival Hall. The vote would be a serious humiliation for Rose, who is determined to stay on as chairman until he retires in July 2011.

Investors do not want to oust him, but wish to dismantle his power base by forcing him to split the roles of chief executive and chairman. He combined the two jobs last year, with unanimous support from his board, even though the arrangement contravened corporate governance guidelines.

The proposal has been tabled by the Local Authority Pension Fund Forum, which represents 49 public sector pension funds with assets of £75bn. It calls on M&S to appoint an independent chairman from outside the company by July 2010 – a year earlier than Rose intends. He is unlikely to want to revert to the lesser role of chief executive, which would be the outcome of acting on the resolution.

The LAPFF has urged shareholders not to protest directly against Rose by voting against his re-election as a director, but to support their proposal for boardroom change. The proposal has also won the backing of three other shareholder advisory groups: America’s Glass Lewis, Pensions and Investment Research Consultants (Pirc) and RiskMetrics, which advises UK pension fund investors. Most big shareholders have already cast their proxy votes, but the result will not be made known until after the vote at the annual meeting. Sources close to M&S believe that about half of shareholders who vote will either back the proposal or abstain to demonstrate their lack of support for Rose’s combined role.

“We have stressed all along our support for the company and for Sir Stuart, and made it explicit that our sole concern is good governance”, said the LAPFF in a statement “We have framed our actions, and made our arguments in the most constructive way possible. Therefore if our initiative garners significant support we urge the board to reflect upon the result, and respond in an equally positive fashion.”

The pressure on Rose from shareholders comes as investors have become increasingly militant since it became clear that City bonus culture was partly to blame for the current financial crisis. City minister Lord Myners – who was previously chairman of Marks & Spencer – has urged institutional shareholders to become active investors to keep companies in line. A series of companies have faced investor revolts in recent weeks, including Xstrata, BP, Shell and Tesco.

Bradford City councillor Ian Greenwood, chair of the LAPFF, said the body was taking its shareholder responsibilities seriously: “Since the onset of the financial crisis, institutional shareholders have with some justification been criticised for failing to exercise their ownership responsibilities effectively. However, it is also incumbent on boards to listen to their shareowners when concerns are raised.”

Rose said last week that he was “not concerned” about the resolution.

About 1,200 shareholders are expected to attend the meeting – one of the biggest turnouts among FTSE 100 companies. Most will be private shareholders, who control some 20% of M&S shares. In previous years, they have been charmed by Rose, but their loyalty this year will be sorely tested after the retailer slashed their dividend by 30% as a result of a 40% slump in profits. Other retailers have performed much better, especially the big supermarkets, although a better-than-expected trading statement last week suggested Rose is stopping the rot.

M&S need not heed the vote on the LAPFF resolution, as it would require 75% support to be effective, but if there is a substantial rebellion it will be a major embarrassment. The retailer attempts to present itself as an exemplary corporate citizen with its green initiatives and “doing the right thing” advertising campaign.

The LAPFF resolution and the potential backlash from private shareholders is not the only problem the company faces. Lady Patten, who chairs the remuneration committee is also in the firing line as she stands for re-election to the board. Patten, a former management consultant, sanctioned huge share awards to Rose and marketing director Steven Sharp. However, faced with a near-certain shareholder backlash at the annual meeting, the pair last month voluntarily handed back one-third of their awards, worth £1.6m.

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Darling to clamp down on bonuses

July 5th, 2009 | No Comments

High-paying City banks forced to hold more capital

City banks that pay out lavish bonuses for short-term profits will be forced to set aside a bigger cash cushion against losses, Alistair Darling will announce this week, as he sets out the government’s plans to crack down on the practices that led to the credit crunch.

With the darkest days of the financial crisis apparently over, bankers in the Square Mile have quietly begun to use the phrase “BAB”, or “bonuses are back,” to signal their hope that the era of outsize pay packets is returning. US bank Goldman Sachs is expected to pay out the biggest bonuses in its history this year, on the back of bumper profits.

But government ministers have stepped up their rhetoric against the City’s bonus culture in recent days, with Lord Myners railing against “weak and lazy” remuneration committees that wave through generous payouts.

As part of measures to re-regulate the banking sector, due to be announced on Wednesday, the chancellor will tell the Financial Services Authority that it must treat banks that pay out large cash bonuses on the basis of short-term targets as riskier than their rivals, and force them to hold more capital.

The FSA has already announced a code of practice for remuneration in financial firms, but Treasury sources said the regulator will be urged to give the new rules teeth, by cracking down on firms that fail to comply. The chancellor would also like to see more use of “clawback” clauses, which allow banks to call in bonuses if a trader’s bets turn sour.

Darling is keen to strike a tough pose on bankers’ pay, after it was revealed that the boss of part-nationalised RBS, Stephen Hester, could take home up to £15m if he meets share-price targets. Hester agreed to defer part of the payout for another two years, to 2014, after the deal sparked public outrage.

Vince Cable, the Liberal Democrat Treasury spokesman, said that insisting bonuses are paid in shares instead of cash was not enough. “Traders are doing that anyway, because the shares are cheap, and capital gains tax is only 18%,” he said.

The chancellor’s plans for cleaning up the City have already sparked a turf war between the government and the Bank of England, with governor Mervyn King complaining last month that, without more powers to intervene in risky financial institutions, “the Bank finds itself in a position like that of a church whose congregation attends weddings and burials but ignores the sermons in between”.

Instead of handing King more control, however, the chancellor will suggest beefing up the Bank’s quarterly Financial Stability Review, which identified some of the weaknesses in the banking sector before the credit crunch.

Whitehall officials have been discussing whether the Bank should in future publish recommendations alongside its analysis, and the FSA and the Treasury then be forced to adopt them or explain why they have decided not to.

This week’s white paper is expected to reject some of the most radical proposals for preventing a future banking crisis, such as splitting large international banks into riskier “casino” arms and standard high street lenders, with only the latter carrying a state guarantee.

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