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James Brockett

James Brockett

10 Mar 2010 | 16:25

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Imagine being the chief executive of a company that loses £6.7 billion. The following year, things get a little better, but you still lose £6.3 billion. Here’s a question – how much would you expect as a bonus? The answer for most of us would be a round number – a big fat zero to be exact– but if your name is Eric Daniels of Lloyds Banking Group, then the answer is a more pleasing £2.3 million.

To his credit, Daniels waived his right to the bonus. But some Lloyds shareholders (and since the bank is 41 per cent taxpayer-owned, that category includes all of us), have been quite rightly asking how this reward is calculated. What variety of success is the incentive recognising, if it’s not to do with making a profit or raising the share price?

This question becomes all the more pertinent when you realise that the figure of £2.3 million – 225 per cent of Daniels’ basic salary of £1.03 million – is actually the maximum allowable he could have been awarded by the Lloyds remuneration committee. They are saying his performance over the year was right at the top of the range.

To understand how this could be, let’s take a look at way the bank’s executive remuneration is structured, as explained in the Lloyds’ annual report and accounts for 2009 (the 2010 version is not published yet). This says that 50 per cent of the bonus is set according to “group financial targets, relating to profit before tax and economic profit”, while 50 per cent is determined by a “balanced scorecard, covering customers, people, risk, and franchise building”.

Lloyds’ profit before tax in 2009 - £1.04 billion – was actually not disastrous. While it was only about a quarter of what Lloyds TSB was achieving on its own before the crash, at least it’s a profit. What plunged things into the red was the scale of bad debts (especially property loans) left over from the HBOS part of the business, which have ballooned from £14.9 billion to £24 billion in the past 12 months. Since this was a legacy factor outside Daniels’ control, the remuneration committee have obviously taken the view that he has met his financial targets as they relate to this single year. The fact that Lloyds has successfully raised huge sums from shareholders – and reduced its public stake from 43 to 41 per cent – will also have helped in this regard.

The other half – the balanced scorecard based on non-financial factors – is a bit harder to quantify, but the biggest task in hand is the integration of the new group, which is now the largest ever UK bank. Lloyds has shed 15,000 jobs since it was officially created at the start of 2009, so the drive for “synergy savings” is clearly proceeding apace. Lloyds has denied that there is a specific target for the number of jobs cut, but “integration” and “cuts” are two sides of the same coin. It’s intriguing to think that their executives might be being rewarded for reducing the workforce, at a time when the largest shareholder (the government) is keen to maximise employment. There’s also a contrast with the US – where Obama has vowed to break up banks that are too big to fail – that one of the effects of the banking crisis on the corporate landscape was to create this super-bank, which will dwarf much of its competition when the economy recovers.

Once this painful period is over, it has dumped all its toxic assets and “integrated” its staff, there’s every possibility that Lloyds will once more be a roaring success. How much of this will be down to the good work of the chief executive, and how much to the safety net provided by the taxpayer, will continue to be the subject of much debate.

Daniels’ announcement that he was waiving his bonus only came after his counterparts at Barclays and RBS made similar gestures. This has led some to speculate that he made the move reluctantly, and that both he and the company believe he is doing a grand job. It’s also worth noting that when all elements in his reward package are considered (salary, bonus and long-term share plan incentive) Daniels earns significantly less than his counterparts at Barclays, RBS and HSBC. Perhaps he offers good value for money after all.

Comments

1. At 15:18 on 11 Mar 2010, Eagle-Eye Terry wrote:

Thanks James, that was really insightful. But I reckon Daniels and Lloyds are getting off far too lightly. While setting a monetary cap on bonuses is tricky - who would want to come up with an exact figure? - surely you allude to the answer when you mention the percentage of his salary he would (if he hadn't been forced to waive it) have received? 225%?!! Surely a 'cap' of 100% could be the maximum, and still a very generous maximum at that compared to what the rest of us get! The problem is these bankers all expect to get these massive bonuses, and so it becomes self-fulfilling. They cry foul saying caps mean they can't compete with the other banks remuneration, but if they all had to stick to certain limits, it wouldn't be so unfair. And we all know about having to make efficiency savings, but sending 15,000 people into unemployment, when you've been bailed out by taxpayers money? It's a disgrace!

Terry.
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Claire Churchard

Claire Churchard

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