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Shareholder power bodes very badly for bonuses

Please sir, give us another 12bn. Only if you promise to pay your employees a (relative) pittance.

As the new cash cow for investment banks, shareholders look set to become increasingly crotchety. And chances are they’ll take a swipe at bonuses.

Goldman’s shareholders already tried to take a swing last month, when they requested a ‘say on pay’ at the bank’s annual meeting, only to be defeated and informed by Blankfein that they were ‘less sophisticated’ than the bank’s board when it came to pay issues.

“The mix of shareholders in financial services stocks has become more activist,” says Nick Studer, a consultant at Mercer Oliver Wyman. “It often only takes an activist shareholder to take a stance and all the others will line up behind it.”

So far, Studer says we’ve only had ‘rumblings’ of discontent over the bonus system, but he adds that this could be about to change: “It’s become apparent again that shareholders don’t get compensated for the capital they put in and the risk they take – the upside goes to the talent, the downside goes to the shareholders.”

Bonuses are in the firing line. Yesterday’s confessional report from UBS admitted that bonuses had something to do with the bank’s $37.4bn of writedowns.

The UBS bonus scheme “failed to distinguish between returns made by skill and those arising from low-cost finance,” according to the Times.

Meanwhile, RBS’ admission that it needs to raise its tier-one capital ratio to 8% suggests the landscape suddenly looks a lot bleaker than it did a few months ago.

“Historically, most banks have returned a strong ROI,” says Simon Adamson at CreditSights, but we are now in a period of extraordinarily low returns for the foreseeable future.”

With further cash calls seemingly inevitable, investors may see this as their chance to effect an irreversible change in the level and structure of bonuses. “This is a once-in-a-lifetime opportunity to rebase compensation,” says Studer. “But banks aren’t going to do it unless the investor community puts pressure on them.”

Comments (6)

  1. It is intriguing to learn that a leading bank has “failed to distinguish between returns made by skill and those arising from low-cost finance”…but then what do you expect from current boards! This is great news for activists.

    Master of the Universe Reply
  2. I hope there will be no bonuses this year… Bankers are already overpaid and the shareholder made a fool of….Watch this space… but it is time the bankers wernt the richest men on the block….Its a disgrace and its been a disgrace for a too long time….

    Carmen San Carlos Reply
  3. I think that once the dust and noise has settled, the ABN acquisition will go down as one of the biggest mistakes in British financial history.

  4. “Bonuses are in the firing line”. I think not!!

    I suspect it’s the shareholders who are in the firing line, and bonuses that are in the line of fire. It makes a difference to the story when you get them the right way round.

  5. Just think how upset Sir Fred Goodwin must have been when he heard that Barclays were about to merge (acquire) ABN Amro … if he hadn’t been that envious, he would have been 12bn (or somewhere near) better off now.

  6. Good point there Todd. The words “wish”, “clocks” and “unwind” must feature very regularly in Goodwin’s mind (assuming, that is, he has one).

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