A ranking of CEO pay at the top European banks compiled by SNL Financial shows little support for the idea that executive compensation and shareholder returns bear a strong correlation.
U.K. and Swiss banks appear at the top end of the ranking of highest remuneration, with UBS AG’s Sergio Ermotti, Lloyds Banking Group Plc’s António Horta-Osório and HSBC Holdings Plc’s Stuart Gulliver each receiving compensation packages above 8 million in 2013. Credit Suisse Group AG’s Brady Dougan is close behind, with a total pay package that year just shy of the 8 million mark.
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Strikingly, while Credit Suisse, UBS and HSBC earned returns on average equity in the high single figures, Lloyds recorded a loss on average equity of 1.89%.
But comfortably ahead in the number one spot is Deutsche Bank AG’s Anshu Jain, who received a pay package amounting to 10.0 million in 2013, including a 6.1 million long-term incentive plan, despite the bank only recording an ROAE of 1.21%. His co-CEO, Jürgen Fitschen, received 7.3 million of total pay.
Two state-supported banks appear on SNL’s list: Lloyds and Royal Bank of Scotland Group Plc. At RBS, CEO Stephen Hester, who took over from the ill-fated Fred Goodwin, earned an annualized compensation package of 6.0 million in 2013. He was replaced in October of that year by Ross McEwan. Over the course of the year, the bank recorded a loss on ordinary average equity of 12.38%, although many analysts speaking to SNL Financial have said that Hester performed well given his task of turning the bank around after its government bailout.
Both Hester and Lloyds’ Horta-Osório were paid more than the CEOs of France’s two largest banks. BNP Paribas SA’s Jean-Laurent Bonnafé and Société Générale SA’s Frédéric Oudéa received 3.4 million and 2.7 million, respectively. BNP Paribas earned its shareholders returns of 5.84%, while Société Générale’s earned 4.43%.
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By GlobalDataA recent report by German investment bank Berenberg also found little correlation between shorter- and longer-term remuneration among bank CEOs and total shareholder returns. Authors Nick Anderson, James Chappell and Iro Papadopoulou analyzed the pay of CEOs at select European banks, finding that their average fixed salary rose 28% between 2008 and 2011. Average total compensation fell from the highs of 2007 "but has remained broadly static over the past five years" — despite the dismal performance of the sector, as measured but the Stoxx Europe 600 Price index.
The Berenberg authors also wrote of how the size and complexity of a bank appear to be the biggest drivers of pay levels. Yet they expressed little optimism that significant change to pay policies can be expected in the sector: "The only option [to spark change] seems to be the arrival of external management."
They noted: "While not unexpected, it does raise concerns as to how shareholders are regarded among the various stakeholders in the bank."
According to Tom Gosling, a partner and leader at PwC’s U.K. reward practice, shareholders still hold some sway, at least in the U.K. He told SNL that the "primary transmission mechanism" putting pressure on bank bosses’ pay is investor activism — ahead of, say, public opprobrium.
Even so, shareholder ire over pay generally has had little effect on top pay levels. Over at Barclays Plc, CEO Antony Jenkins faced the prospect of a shareholder rebellion over proposed executive pay increases during the U.K. bank’s annual general meeting in April — though not strong enough to prevent a vote in favor of the proposal. Jenkins waived his bonus for that year, and does not appear in SNL’s list of 15 top-paid European bank CEOs.
At the bottom of SNL’s table is Skandinaviska Enskilda Banken AB’s Annika Falkengren. She was paid 2.3 million in 2013 despite earning her shareholders a return on average equity of 13.22% — far ahead of her peers in SNL’s sample.
Danske Bank analyst Matti Ahokas told SNL that Swedish banks have been among Europe’s best performers in the sector over recent years, yet Falkengren’s pay is the consequence of a particular social and political environment in the Nordic region.
"Bonus is a very dirty word in Sweden; transparency about executive pay in Sweden is high and … there is a disproportionate level of focus [on it]," Ahokas said.
"[Swedish banks] are unbelievably heavily scrutinized companies and in the context of the global industry are amazingly efficient and amazingly well run. … It’s not been the case that Swedish executive pay has come down over the course of the last seven years. It was never raised to the same levels as elsewhere."
On the way down
Regulators have stepped into the pay fray, with mixed results. For months, EU members have been at odds over the capping of banker bonuses. Banks in the U.K. and elsewhere have begun using "allowances" to circumvent existing EU rules capping bonuses to 1x — or with shareholder approval 2x — fixed salary. Banks argue that the "role-based" allowances form part of bankers’ fixed pay, and not part of the bonus component.
Bank of England Deputy Governor Andrew Bailey has described such measures as the "least worst alternative" to address pay regulations that some fear could drive top bankers to work in more lucrative jurisdictions, such as the U.S.
But on Oct. 15, the European Banking Authority ruled that these allowances paid by banks to executives were nearly all in breach of the cap on bonuses.
RBS’ Ross McEwan argued at the time that "you need to be able to pay people to get us into the position we want to be" and he said that "you do not want to be moving your pay structures around [each year]," The (U.K.) Daily Telegraph reported Oct. 18.
There is a hope on the horizon for the City: Britain is challenging the bonus cap law in the EU’s top court, and a ruling is expected in early 2015. As for the 2014 bonuses, a senior Bank of England official said Oct. 22 that it is now too late to change them, Reuters reported the same day.
Bank CEOs can expect to hear more from their shareholders about pay levels, said Cliff Weight, an executive remuneration consultant with MM&K. "There is no doubt that a lot of shareholders have said that they are not getting an adequate return, particularly if you work it out on a risk-adjusted basis," he told SNL. "They are applying pressure."
In the years ahead, banks may find it harder to justify relatively high executive pay level as their sector undergoes a big change in how they generate revenue, Weight said. A combination of factors, including shifting regulations and changing customer needs, has already been putting earnings under pressure.
When asked about the new landscape for banks and the repercussions on executive remuneration, Weight replied: "There are four stages of change: denial, acceptance, planning and implementation. We are well into the acceptance stage. It took quite a lot of denial, though. There are after all some outposts of people who haven’t recognized that the world has changed."
Gosling agreed that, eventually, lower profitability of the sector will put downward pressure on the pay of CEOs and others in the banking industry.
"Ultimately, the economics will bite here," he said. "Most banks have earned mid-single-digit returns since 2009 and at some point that has got to change. There are no immediate prospects of market conditions changing sufficiently for revenues to pick up to bridge that gap.
"It’s really difficult to be precise about it, but the reality is that for returns to get back to where they need to be — investors are really looking for double-digit returns — either productivity has to go up by a third or pay has to fall by a quarter, roughly. The reality is that it is probably going to be a bit of both."
