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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] Recent postings Welcome to my new blog , in which I take a look at the business and the HR facts and figures behind the FTSE -100 companies making the news.

Soon after 22 February’s ballot for industrial action closes, we’ll learn the outcome of the latest chapter in the saga that is the BA dispute. Cabin crews affiliated to Unite are voting on whether they should walk out in protest at job cuts and changes to working practices. Considering that the previous ballot – albeit one that was spoiled because some ineligible people voted – recorded 92 per cent in favour of a strike on an 80 per cent turnout, it would be surprising if the result were anything other than a repeated mandate for action. BA’s plans to keep services going during the disruption, including bringing back departed staff and training ground crews as substitutes, only show how worried the company is at the prospect.

The public is unsure about where its sympathies should lie – many customers are simply wondering whether they’ll still be able to get to Tenerife for their Easter getaway, of course – but any objective analysis must focus on the state of the company’s finances. The chief executive, Willie Walsh, has said that BA is in a “fight for survival” and sacrifices must be made, but the union has pointed to the latest results – a relatively trifling £50 million loss for the quarter – as a sign that the situation is not as bad as all that. So who is right?

Whichever way you look at it, BA is in dire straits. The latest quarterly loss might have been less than what most analysts were predicting, but the firm has still shed £342 million in the first nine months of the 2009-10 financial year after posting a £401 million total loss in 2008-09. The airline has a cash balance of about £2 billion so, while it’s not about to go under, it can’t afford too many years like this one. And that’s before you consider the biggest millstone around the company’s neck: its pension scheme. This is showing a deficit of £3.7 billion – well over the company’s market value of £2.38 billion. (The old joke is that BA is a pension company that also runs a few jets.) The deficit is so large that a proposed merger with Iberia, which might still make sense, is on ice because the Spanish company is insisting that BA sorts it out first. The management team is committed to paying an extra £131 million a year towards filling the hole and, even if radical action is taken, this is going to be a drain on resources for many years yet.

Reducing costs seems the only option, but where to make the cuts? Cutting staff from 15 to 14 on each long-haul flight (one of the most controversial issues in the dispute) is predicted to save BA about £140 million annually and would lead to 1,000 redundancies among BA’s 12,000 cabin crew members. It’s not a palatable option for the workforce, but neither is the alternative of across-the-board pay cuts. Softer options such as voluntary leave, periods of unpaid work etc have been tried without conspicuous success. When left with a choice of equally painful options, a union’s default position can be to resist everything. Given that a strike would itself cost the airline an estimated £25 million a day, BA’s overall position is going to be made even worse by such resistance.

While the biggest factors behind the current problems – high fuel costs, intense competition and fewer business travellers – are industry-wide, BA is being hit hardest because of its historically high staff costs. The airline’s troubles are sad but inevitable. Whatever the outcome, I’m not sure that the union can win. Either the company succeeds in forcing through cuts and culture changes or a prolonged industrial battle becomes another dead weight to bring the airline down.
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Welcome to my new blog , in which I will take a look at the business and HR facts and figures behind the FTSE -100 companies making the news.


Cadbury is in the process of being taken over by US cheese maker and all-round food giant Kraft. For anyone who has missed the details (or has switched off during the interminable negotiations and games of bluff that have taken place in the last few months), the Cadbury board has finally accepted a bid for the firm valued at around £11.5 billion. This means that shareholders have until 2 February to decide whether or not to accept the deal.

Notwithstanding the complaints of Warren Buffett, one of Cadbury’s largest shareholders – owning 9 per cent of Cadbury shares – the deal is almost certain to go ahead. Around 40 per cent of Cadbury’s shares are owned by US investors who aren’t likely to be swayed much by the “great British brand” argument, while another 20 per cent are owned by hedge funds that are only there at all because they hope to profit from the takeover. In fact, few shareholders of any kind will turn down the chance of a short-term profit – as the Cadbury board well knows, which is why it has finally seen the writing on the wall and accepted the offer (but not before a desperate search for another buyer to save Cadbury from Kraft’s clutches).

The big HR story in all this is the fate of Cadbury’s 4,500 UK-based staff, especially those at the firm’s historic site of Bournville in Birmingham. The union Unite certainly fears the worst, and some of these fears might be justified: Kraft has financed the takeover with borrowings of around £7 billion, a debt that will fall on the new firm and is bound to affect its financial priorities. There are some parallels with the Glazer family’s takeover of Manchester United FC – except that while the Glazers could make some of their money back by selling Cristiano Ronaldo, Kraft is more likely to seek a return on its investment by making “synergies” that include cutting front-line jobs.

But perhaps some of the pessimism has been overdone. Far from being a quaint British institution that is about to be swept away by a new tide of American efficiency, Cadbury is itself very international in outlook - it employs 46,000 people in 60 countries – and also very profitable (its last full year results showed a turnover of £5.4 billion and an operating profit of £638 million). Despite the philanthropic roots of Cadbury’s 19th century founders, the company has not up until now been run as a charity. If it was desperately uneconomic to continue making chocolate bars on these shores, then sentiment alone would not have been enough to preserve jobs this long. Instead, Cadbury is actually a British success story, and Kraft, while it clearly believes itcan enhance its profitability further, would be foolish to move in and destroy the foundations of that success. And before too many political points are made about foreign predators swooping on UK firms, it should be remembered that Cadbury has made its fair share of acquisitions over the years, including some American ones such as the Adams chewing gum firm it bought for $4.2 billion (£2.6 billion) in 2003. If a business is worth its salt, it is worth keeping - whatever the nationality of the owners.

An interesting footnote to the saga is that Cadbury’s chairman Roger Carr has called on the government to review its list of firms that enjoy state protection from overseas bids. Currently, only Royal Mail, BAE Systems and Rolls Royce enjoy this status. It would be stretching it to argue that chocolate-making is an issue of national security, but there are rumours that UK energy firms such as National Grid and Centrica are on the shopping list of Russian giant Gazprom. That would certainly raise some political hackles. Watch this space.
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I’ve just finished reading an excellent book on economics: The Affluent Society by John Kenneth Galbraith. Putting aside the fact that I only withdrew it from the library because his other well-known book, The Great Crash, was unavailable (it’s quite in vogue at the moment), I thought he had some interesting points that could be relevant to the current economic situation.

His main line of argument is that nowadays most of the goods we produce in the West are non-essential. Because the vast majority of our basic needs (such as food and clothes) are in ample supply, the economy has only been able to continue to grow by producing more and more superfluous products – products that, were it not for the efforts of the advertising industry, there would be no demand for.

Despite this, economists continue to view production as all-important to the economy – think of all the stats about GDP and the worrying caused by the economy shrinking. However, here’s the most important point: as most of what is produced is non-essential, why do we care if production goes down? In fact, Galbraith argues, what people in an affluent society really care about is employment and unemployment: they don’t mind what is produced, as long as they can be paid for producing it and enjoy a good standard of living.

But if we accept that employment and job security are our goals rather than production and efficiency, it challenges a lot of widely-held assumptions, many very pertinent today. Why promote efficiency in our public services if it is going to have a huge human cost? Why permit massive mergers or acquisitions in the name of efficiency if it’s going to put thousands out of work?

There is a lot of muddled thinking about this among our political leaders. On the one hand the government professes to be concerned about unemployment but, on the other, it looks to privatise the Royal Mail in the name of efficiency. It spends billions propping up the banks but when it comes to the civil service and local government it insists on reductions in headcount. The media don’t help either with articles banging on about “non-jobs” in councils; if those people weren’t doing their non-jobs, they’d be in the dole queue and the taxpayer would be paying for them anyway.

The carmakers that have implemented three-day weeks and reduced hoursare perhaps showing the way forward: they are showing that in tough times, and perhaps in all times, keeping people employed is a goal in itself and not everything should be sacrificed for efficiency and the bottom line.
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Earlier this week I had the good fortune to attend the CBI’s annual conference, and as well as listening to some of the country’s noted politicians holding forth about the financial crisis, I heard some pretty profound stuff from some of the other speakers on the platform. The consensus seemed to be that the UK has become a nation of bankers, at the expense of the manufacturing sector; that too many young people are growing up wanting to be city traders rather than engineers; and that through their buying and selling of collateralised debt obligations, workers in the financial services industry had sold their souls and lost touch with the basic morality of good, honest, ‘real work’.

The sentiment was summed up by one of the chief executives speaking at the conference from a manufacturing viewpoint, who related the business motto that the only way to create wealth is to grow it (agriculture), dig it up (mining), or make something out of what you dig up (manufacturing). Anything else is not wealth creating, goes the argument – it just passes wealth from one person to the next.

By this definition there are an awful lot of people in Britain who have lost touch with what real work means – manufacturing accounts for only 13 per cent of our economy, and agriculture a fraction of that. Yet a lot of people who aren’t truly wealth-creating have had years of going home with a lot of money in their pockets. Will the coming recession provide a shock to the system?

I’m reminded of the words spoken by Martin Sheen in the film Wall Street to his banker son (played by Charlie Sheen), who is just about to be jailed for insider trading: “Take a good look at yourself son. It’s time to stop going for the easy buck and start producing something with your life. Create, instead of living off the buying and selling of others.”

A lot of commentators cleverer than I am believe that while previous recessions have hit manufacturing hard, this time it will be different and it will be the middle class pen-pushers who will feel the strain. If this is true, then a lot of us might have to get back in touch with ‘real work’; either that, or face up to real unemployment.

It’s all very thought-provoking stuff. Anyway, you’ll have to excuse me, I’m off to try and dig up some wealth.Comments [0]
When I heard on the news that Iceland was going bust, I was quite surprised: their supermarkets always seem so busy and they have those excellent adverts featuring Kerry Katona. Imagine my shock, then, when I discovered that it was in fact the whole Scandinavian country that was going under, rather than the company of the same name.

Despite their economic woes, the Icelandic government have supported their own citizens by guaranteeing all domestic savings in their banks. But, disgracefully, they are refusing to do the same for the thousands of UK savers who have deposits in accounts such as Icesave. It’s fallen to our own chancellor to step in and guarantee this money on behalf of the UK taxpayer, even though our government has nothing to do with the transaction and we have our own banks to worry about.

As their country are shamelessly conning us out of a few million, can I be the first to suggest a boycott of everything Icelandic? Perhaps we should stop buying Bjork records or going on overpriced whale-watching holidays to Reykjavik where you pay £8 for a pint of beer. And we could keep the owner of West Ham hostage until they pay up.

Seriously, though, this episode says something about how governments look after their own when it comes to a crisis. Everything is more international these days, not only the financial system but also the labour market – millions of Brits live, work and hold assets abroad, and millions of foreign nationals do the same in the UK. But when it comes to the crunch, it seems that in many cases they won’t ever enjoy the same rights and protection as the citizens of a country. Which is why when the world economy hits the skids, migrant workers are expected to head back to their home countries, taking their money with them.

It’s a natural impulse in a crisis to be protectionist and nationalistic, but I’d like to think that in Britain we would take a different attitude to the Icelanders. We need to continue to welcome foreign investment and workers, and that means treating foreign money and labour as equal to our own. If foreigners withdrew all their money from the UK we really would be in trouble.

So let’s recognise that as an international community we are all in economic trouble, and not fall back on a narrow-minded nationalist mentality. Either that or invade Iceland – now there’s an idea!
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There’s been a lot of talk about public-sector pay this month. The latest three-year deal for NHS staff has been criticised for being well below inflation, Gordon Brown has turned down a pay rise for MPs, while his attempts to restrict pay for teachers and the police have continued to raise people’s hackles.

The government clearly want to be seen to tighten a few belts in response to the worrying economic situation – even if the effects of such a policy on controlling inflation are seen by economists as marginal at best.

But if Gordon really wants to save money, why doesn’t he look at the countless millions poured into public-sector pensions? They cost the taxpayer more than £21 billion this year. To put this in perspective, it’s more than all the rest of the workforce put into their pensions – even though the public-sector only represents 18 per cent of all working people. A large proportion of private sector employees pay more (through their taxes) for the retirement of civil servants than they do for their own retirement.

The supposed pay ‘restraint’ in the public-sector is nothing more than empty posturing when the vast majority of its staff, including MPs, are retiring at 60 for a comfortable few decades living it up at everyone else’s expense. Meanwhile, many of the taxpayers funding this will have to work until they’re 70, or simply until they drop dead. Our baby boomer political leaders don’t have any interest in solving this inequality because they will all be long gone by the time the young people in this country start feeling the pain.

I for one would happily give everyone in the public sector a whopping pay rise in the present if they would accept more realistic pension plans that are even in the same ballpark as what the rest of us have to deal with.
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One of my colleagues, who is normally a clean-living and honest sort, has recently developed the urge to gamble. Apparently she wants to take a bet on the TV show “The Apprentice” because she is so sure she knows who’ll win. The other lunchtime she was seen hot-footing it to the local bookies with a wodge of notes, only to be turned away on the grounds that the series was filmed several months ago.

Sceptics might suspect that her enthusiasm for picking Sir Alan’s protégé had less to do with the pre-eminent skills of the candidate in question and more to do with inside information. But after such an exhaustive selection process, with weeks of tests, exercises and interviews, shouldn’t it be obvious to all concerned who is the best person for the job?

Not necessarily. Everyone watching The Apprentice has a different opinion of who they would hire if they were the boss. But their opinions count for nothing. His Sugariness will be the only one with the power to make the decision, and he’ll do it based on who fits into his company culture, and whom he personally admires.

It only goes to show that, from an employer’s perspective, recruitment still often comes down to a matter of “gut feel”. If such a long and drawn-out process does not produce a clear winner, what chance does the average firm, limited to two interviews of half an hour each, stand of getting the right candidate?

The answer is that, objectively, there is no right candidate – only the right one for you. In that sense, recruitment is a bit like dating; you have to keep on meeting people until you find the one you click with. If somebody was trying to predict who you’d choose as a girlfriend, the chances are they’d have a hard time trying to bet money on that as well.

Come to think of it, perhaps that might make a good concept for a new reality show?

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So, the government have given all UK employees the right to request time off for training. They’ve also given parents of children up to 16 the right to request flexible working. This is in addition to parents of disabled children and carers of elderly and vulnerable adults, who already have the right to request variable hours and flexibility.

How generous – all these people given the “right to request” good things – and the employers can’t complain, because they have the right to turn the request down!

Everyone’s happy, so why not extend the concept a little further? The right to request a pay rise, perhaps? The right to request extra holiday? The right to request gym membership? The possibilities are endless.

The truth is that everybody already has the right to request anything they like. What is important is how employers respond to that request. And an employer’s response won’t normally be dependent on the age of that person’s child or the other details of their home life – it will depend on the dynamics of their team.

Because here’s the thing: not everybody can work flexibly. For everyone working part-time or from home, there’s someone tied to their desk in the office answering the phones. Neither can everybody have regular time off, even if it is for something as worthy as a college course.

In recent years, bosses have been increasingly prepared to be reasonable when faced with parents who want to work part-time to accommodate small children. The government’s legislation seems to be predicated on the idea that there are others queuing up to be treated in a similar way - only they are too scared to ask. So they wait for good old Gordon to come along and give them the right.

But are we talking about rights or privileges? If you have the right to something, you don’t have to request it – you expect it. A privilege, on the other hand, is something you are granted.

A line has to be drawn somewhere, and the government’s legislation still allows employers to be the ones to draw it. So don’t be fooled, if you get to work flexibly, don’t thank the government for giving you the right – it’s your employer who has given you the privilege.

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The best teacher I ever had wasn’t really a teacher at all. For most of his career he had a proper job – well, if you count being a journalist as proper – and had only been tempted to run a postgraduate course in his latter years to give the next generation the benefit of his experience.

And for us up-and-coming journalists, that was what made him such a good teacher. He had only recently departed the newsroom of a national newspaper, and knew exactly what it was like. He told us stories that inspired us to want to follow in his footsteps – and told us about the mistakes he’s made along the way. He might not have had much experience of teaching, but he gave exactly the kind of advice that we all wanted to hear.

The best vocational teachers are like that. If you want to learn how to be a nurse, a mechanic, a fireman, a carpet-fitter, or even an HR professional, it’s best to listen to people who have done the job. And because it’s a fast-changing world, ideally you want to listen to somebody who has done the job recently, not 20 years ago.

But when you start talking about academic qualifications rather than vocational ones, it’s a different kettle of fish. The lecturers who are most respected in universities are people who are immersed in theory. They have spent decades tied up in books and research and, in the eyes of most academics, that is what makes them worth listening to.

It’s this contrast that comes to mind whenever I hear the view (frequently expressed by the government) that there should be more vocational skills taught at university.

Many university courses are taught with a vocational slant, even the often-derided media studies could be a great success if they were to be taught by people like my old journalism tutor, ie. people who have got their hands dirty in the real world. But too often they aren’t, because they’re set up and run by academic people in an academic environment, they lose touch with the job they are supposedly teaching students to do.

And the sad thing is that, since cash is king in this world of tuition fees, these failing courses are judged not by the number of students they get into jobs but by the number of paying punters they attract.

The last time I heard from my journalism tutor he had given up teaching his postgraduate course. Maybe I got in there at the right time.

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