The former bosses of two of the biggest casualties of the UK banking crisis called for changes to the sector’s bonus system during a public grilling by MPs.
Appearing before the Treasury Select Committee, Sir Fred Goodwin, former chief executive of RBS, Sir Tom McKillop, former chairman of RBS, Andy Hornby, former chief executive of HBOS, and Lord Stevenson, former chairman of HBOS, said they were “profoundly and unreservedly” sorry for their banks’ failure.
The banking chiefs admitted that changes were needed to the current banking bonus system, which has awarded senior executives and traders millions of pounds for huge risk-taking, contributing to the banks’ downfall. RBS is now 68 per cent state owned, while HBOS has now been taken over by the newly formed Lloyds Banking Group, which is 43 per cent owned by the British taxpayer.
Stevenson condemned “short-term” bonuses that were paid out in cash in favour of shares that could be retrieved after a certain number of years. But he refused endorse salary caps and clawback clauses as recently imposed in the US by President Barack Obama.
Although he admitted “there is always scope for improvement for remuneration systems”, Stevenson said HBOS had deliberately created a system a few years ago where top-level bonuses were automatically remunerated in shares.
He also denied that employees at HBOS were part of a banking system that paid out bonuses 10 times the size of salaries, saying this was the difference between investment and retail banks.
“I’m not saying we got it right but we are not paying 10 times salaries in bonuses,” he said.
His former chief executive Hornby added: “We need to look several years down the line and make sure annual bonuses are being linked to the long term”. He suggested five-year reward patterns were a better option.
McKillop said there was “a fundamental need” to review bonus policies in certain parts of banking. He also said “not everyone was in this class” of multi-million pound bonuses, revealing that the average salary at RBS was £27,000 and average bonuses were 10 per cent.
His ex-colleague Goodwin said current remuneration policies had been driven by a highly competitive market and that many practices had come over from the US, “creating serious angst within banks”.
During the three-hour questioning, the former banking chiefs also came under severe personal criticism for bad risk management, lack of banking qualifications and all-round bad judgment.
Labour MP John Mann drew attention to poor morale among former HBOS staff at the new Lloyds Banking Group, which was created last month through the takeover of HBOS by Lloyds TSB. He said a recent internal review revealed that over half felt demotivated and 82 per cent were worried about their job.
Hornby said that “it would be extraordinary if this was not the case”, admitting there was “considerable concern about long-term job security following the merger”.
“I believe profoundly the deal with Lloyds provides the best solution possible in the circumstances and I hope that morale will increase,” he added.