LONDON: Banks are failing to rein in excessive payouts for staff below the boardroom level despite a public backlash against a bonus culture blamed for contributing to the financial crisis, say leading investors.
While higher levels of engagement by shareholders and political pressure since the crisis and the Libor rate-rigging scandal have seen some top executives waive or take smaller bonuses, lower ranks have not been subject to such restraint.
In Britain – a global investment banking hub and home to most of Europe's top-earning bankers – the annual results season has seen a series of banks disclose payments are on the rise, angering some shareholders.
Investors do not have the power to veto the bonuses of staff below boardroom level, but could voice dissatisfaction by voting down directors' own remuneration packages.
"It certainly looks as though previous commitments we received have been abandoned," said one fund manager with stakes in British lenders including Lloyds, Barclays and HSBC. The investor asked not to be named ahead of meetings with the management of banks in which the fund holds shares.
Reuters surveyed institutional investors whose stakes in British banks amount to around US$12bil.
Last month Barclays said it raised bonuses at its investment banking division by 13% in 2013 even as its profits fell, prompting widespread criticism.
Business leaders' group the Institute of Directors said the bank's bonus policy raised the question of whether it was being run for its shareholders, or its staff.
"It does seem incredible to me that when profits go down from the investment bank, they put bonuses up," said Martin Gilbert, chief executive of Aberdeen Asset Management, one of Europe's biggest fund managers, speaking at a conference.
Aberdeen is about to inherit significant stakes in institutions such as Barclays and Royal Bank of Scotland (RBS) when it completes the acquisition of Scottish Widows Investment Partnership (SWIP).
Other banks lifting bonuses in 2013 included HSBC and Lloyds. Outside Britain, Switzerland's biggest lender UBS said it had increased its bonus pool for 2013 by 28%.
In the US, Morgan Stanley, Bank of America and JP Morgan raised average staff pay by 6.6%, 7.5% and 3.8% respectively, while Goldman Sachs cut it by 4%.
Barclays CEO Antony Jenkins has said he had to increase bonuses to stop key staff defecting to rivals and was quoted in a British newspaper saying he feared a "death spiral" where the bank struggled to attract good staff and its brand was damaged.
Some investors are not impressed by this argument, however.
"That's the story they always peddle. I think someone ought to test their poker face on this one," said one Barclays shareholder who also holds stakes in Lloyds, RBS and HSBC.
"A lot of the executives are doing the right thing in terms of moderating their pay and refusing bonuses and things like that. It's the level under there that it still looks out of control," said the shareholder.
However, another Barclays shareholder acknowledged banks were "between a rock and a hard place" on investment banker pay because of the risk of losing staff but said the need to pay big bonuses was detrimental to the bank's business model.
"It's bloody annoying. It's not what we want," the shareholder said.
Loss-making RBS – part nationalised after being bailed out in 2008, and under pressure to restore its standing with its political masters and the public – bucked the trend in Britain with staff bonuses for 2013 down 15%.
Some investors in banks argue critics of bonuses are missing the point as executive pay is now under much closer scrutiny, particularly since shareholder votes on remuneration became binding under new legislation last year.
"There have clearly been changes to the relationship between boards and shareholders because we now have the binding vote on the remuneration report," said Dominic Rossi, global chief investment officer for equities at Fidelity Worldwide Investment.
Shareholder advisory group PIRC on Thursday said it will advise investors to vote against "excessive remuneration packages".
A package is deemed too much by PIRC if CEO bonuses amount to 200% of base salary, pay rises faster than shareholder returns or if the head of the firm's pay is more than 20 times that of the average worker at the organisation.
It is rare for investors to block remuneration packages, however 2012 saw a number of such revolts, dubbed the "shareholder spring".
Barclays' boss Jenkins waived his bonus for 2012 in recognition of the bank's implication in the Libor scandal. When Ross McEwan was appointed RBS chief executive in 2013, he said he would forgo an annual bonus for 2013 and 2014 while he worked on leading the lender towards recovery.
But some investors counter that this cultural change has applied to the boards of listed companies who have to disclose details of their pay in annual reports and submit them to shareholder votes, but not the next level down.
Figures from Europe's banking regulator show that more than 3,500 bankers in Europe earned 1 million euros or more in 2012 with the financial hub of London, home to many global groups' European headquarters, accounting for the lion's share.
The latest data from the European Banking Authority supports the idea that pay restraint is not affecting the middle tier of bankers. It shows 3,529 bankers in the EU earned at least €1mil in 2012, up 11% from 2011.
Britain accounted for 2,714 of those, up 11% on the year before, partly reflecting London's position as Europe's financial centre and home to big operations for banks from the US, Switzerland and other countries outside the EU.
However, Fidelity's Rossi highlighted since the 2008-09 crisis, banks have started deferring bonuses over at least three years and paying more in shares than cash. This, banks argue, diffuses the risk-taking culture that contributed to the crisis by making payouts conditional on long-term performance.
"The fact is there has been quite a significant change in the remuneration culture within banks and also the level of engagement that is taking place between banks and shareholders has never been stronger," he said. – Reuters