Lloyds Considers Overhaul of Bonus Structure
Sector: Banking & Finance
31st May 2011
Lloyds Banking Group is considering radical reforms to the structure of bonus payments for its handful of investment bankers and executives to deter them from taking unnecessary risks. Currently, the industry standard is to measure performance against return on equity but the metric has been deemed unreliable because it encourages staff to take on dangerously big amounts of debt to boost returns. Instead, the state-backed lender is believed to be weighing up plans to move its model to return on risk-weighted assets or risk-adjusted return on equity, which strips the flattering affect of leverage out of performance.
António Horta-Osório, the new chief executive, is known to have been highly supportive of the principle and is expected to introduce the change following the bank's strategic review next month. Lloyds is in a rare position of being able to set the agenda on pay as it employs only about 50 investment bankers, so they don't account for such a disproportionate amount of profits as occurs at Barclays and Royal Bank of Scotland. Reform of the structure will not necessarily mean bankers are paid less, however. Insiders said it was more likely to mean that star performers are rewarded very handsomely while others receive small performance payouts. The scale of pay at Lloyds, which is 41pc-owned by the taxpayer, drew investor reprimands recently, after it emerged that Mr Horta-Osório joined the bank on a £13.4m package. Shareholder groups the Association of British Insurers and Pirc both raised concerns ahead of the annual meeting this month.
The targets for Mr Horta-Osório's bonus have yet to be disclosed, but one measure is tied to small business lending. He is expected to incorporate a risk-adjusted metric when the new remuneration code is unveiled. The details are expected alongside Lloyds' much-anticipated review on June 30. The review will give the market a picture of the goals, targets and shape of the bank over the next three to five years. Speculation has mounted about a possible sale of the insurance business, Scottish Widows.
Investors have already wrung out changes to bankers' pay that go beyond the Financial Services Authority's code. HSBC has introduced a new approach that requires directors to hold on to long-term stock awards until retirement. It also reduced the maximum annual payout for the chief executive from £15m to £12.5m. Barclays is also planning to change some of the performance criteria attached to its long-term incentive plans to include measures such as sustainability and risk-weighted assets.
Source: Telegraph
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