BAD news for big bankers. Their bonuses are in the firing line. Not quite as fanciful a prospect as you may think. Imagine the consternation in the comfy coffee rooms of the City of London last week. The Financial Times, the sedate bible of city toffs, was running with the story. It carried the ominous headline: ‘Watchdog to focus on bank bonuses’. You can imagine their upper crust apoplexy: how dare the City watchdog meddle in the pay of the privileged? None of its business. This is a matter for the directors and larger shareholders. Their pals. No longer so. Bonuses are big bucks. So big that they are now as dangerous as dynamite. In extremis they could sink a bank. And if they pose a danger to UK financial giants, we can be sure that they are bigger threats to Ireland’s fragile minnows.
David Drumm, of Anglo; Eugene Sheehy, of AIB; and Brian Goggin, of B of I should bin the FT these days, ban it from the building. The paper is peddling heresy; not suitable reading for their staff.
The UK watchdog has decided to include bonuses paid to top bankers as part of the risk profile of a bank. If the boss is overindulged, the bank could be told to bump up its capital base.
Bonuses have been a favourite topic of the FT recently. It gave oxygen to the argument that the bigger the bonus for the boss, the more likely is the bank to take risks. The chief executive and his traders will be prepared to cut corners in search of short- term bonuses. Remember, banks are not just safe havens for small savers. They bet big money.
Big bets mean bigger and quicker profits. Or losses. Short-term goals are not limited to traders. They are equally lethal in the lending game. The more bankers lend, the chunkier their short-term bonuses. Uncomfortably, in current conditions, the more they lend, the bigger too the danger of borrowers defaulting.
If the defaults surface a few years down the road, the bosses will already have trousered fat bonuses. When the bad debts emerge, the banks — not the bosses — will take the hit.
Bank bonuses in Ireland are outrageous. Last year David Drumm of the troubled — but small — Anglo Irish Banks picked up a €1.9m bonus, based on ‘performance’. His total package amounted to €3.015m. Anglo is deep into property. If property loans turn sour, Anglo’s book could be peppered with bad debts. Drumm will have already buried his multi-million bonuses in his back pocket. Last year, Anglo’s share price plunged from €15.71 to €8.48 today. Shareholders felt plenty of pain while Drumm was rewarded with largesse. The market smelled trouble. The Anglo remuneration committee had no sense of smell at all.
Ditto Brian Goggin, of the Bank of Ireland. Goggin received an even bigger bonus than Drumm. His staggering €2.1m ‘performance pay’ set an Irish record. B of I shares plunged from €17.50 to Friday night’s close of €8.10. So much for the mantra of keeping the interests of shareholders and managers in line.
Eugene Sheehy, of AIB, was the poor man of Irish banking. Poor Eugene’s bonus fell to €850,000; but he made up for it by netting a €2.1m package. That’s about 10 grand a working day for Eugene. At the beginning of 2007 AIB’s shares stood at €22.5 compared to last week’s closing levels of €12.94. It seems that the remuneration committees in the banks are the only people on God’s earth who believe the boys have cut the mustard. The markets are saying exactly the opposite, fearing that the three publicly quoted banks may soon be forced to raise funds. Waves of foreign sellers have pummelled the shares.
Last week, B of I announced poor results. Goggin’s 2008 bonus remains a closely guarded secret, but expect a tidy little sum.
Anglo is an even worse case. A far smaller bank is rewarding its bosses with lorryloads of loot at a time when the market is flashing serious danger. Anglo even gave a departing executive, John Rowan (widely believed to have been disappointed at not having taken Drumm’s job), a gratuitous payment of €1.1m “as recognition of his substantial contribution to the group”. Anglo was even more generous to Tiarnan O’Mahoney when he too failed in his bid for Drumm’s job. He was given €3.65m ” in recognition of his substantial contribution to the group”. Wow, it pays to be pipped at the post at Anglo.
Compensation for failure to reach the corporate summit seems to have spread beyond banking. Last week the FT, again leading the field in exposing these practices, gave prominence to a story of a £2.5m (€3.125m) payment to Andrew Witty, of GlaxoSmith Kline. Mr Witty was passed over for the top job.
More tellingly, the FT explained growing fears that remuneration committees in UK companies were lashing out the loot in buckets today, because the downturn is coming tomorrow. Next year profits could crash, so it will be harder for remuneration gangs to look after the lads. The Glaxo case is clear evidence that the bonus game has spread beyond the UK banks. No more so than in Ireland, where bonuses are at epidemic levels.
The clown prince of Irish industry, Maurice Pratt, was given a €500,000 bonus in 2007. God knows why. This was the same year that he later bet the bank on good weather, a share buyback and a single product. He was wrong on all three counts. The shares have tanked. Maurice is still in situ.
Worst bonus example of the lot was the premature gift of €150,000 to DCC’s Jim Flavin for ‘winning’ the insider dealing case in the High Court. In the end, Jim lost. No announcement has been made about the return of the bonus. It is hardly a coincidence, but all four super- generous members of the DCC remuneration committee are bankers, deeply embedded in the bonus culture.
We have learned a lot from the insiders at UK banks about the bonus racket. But one ray of hope shone out in the middle of the orgy. Ten days ago, a rare breed of Irish businessman, Willie Walsh, gave back his bonus to BA. Willie acknowledged that he had made a dog’s dinner of the opening of Terminal Five. No matter that Willie has made a roaring success of his BA career in every other aspect, he returned stg£750,000 to his shareholders. While Willie handed back the bonus and blamed himself, Maurice Pratt pocketed his and blamed the weather!
Let us applaud Walsh for a principled refusal to milk a much abused corporate cow.
Yet Eugene, Brian and David need not fret too much. The Financial Regulator in Ireland is a shadow of the UK watchdog, the Financial Services Authority. It is a master at throwing shapes but an amateur at action.
Our homegrown bankers will not be troubled by annoying little questions about how their bonuses will pose a danger to their bank’s solvency. Well, not until an accident happens.