Bank pay is becoming a bank business risk

18th March 2013

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You have to wonder if the British public and the High Street banks will ever, properly, come to terms with each other again.

The latest news is that Santander has paid a mere 19 people a million pounds or more in its UK arm as the Guardian reported this week.

That represents an example of extreme parsimony in comparison with other banks.  We have also seen RBS pay 95 people a million or more, HSBC pay 204 people at least this princely sum of a million and Barclays top the poll with 428 members of staff paid a million or more.

It is no wonder the public’s patience is running out as they face household bills that have risen 25 per cent in five years, far outstripping the increase in salaries as u-switch calculated last week.

The world of investment banking has always felt like a world apart from the ordinary person in the street. But that is investment banking not retail banking. This list includes Santander, parent of what was once that high street stalwart Abbey National. It includes HSBC, a global bank but one that was previously Midland Bank, and Royal Bank of Scotland which, of course, owns Nat West.

But it is the bank that hasn’t changed names or parents that has outstripped its rivals in the pay stakes, Barclays. There is an explanation of sorts. Barclays is arguably as much an investment bank as a high street bank. What may go unappreciated by the British public is that fact that Barclays tried to buy Lehmans just before it crashed, and then picked up a significant proportion of its post-collapse operations. The deal struck by Bob Diamond to buy these operations was once regarded as one of the best of the century.

But now because Barclays owns a huge investment banking operation, it also means that Barclays is top of the millionaire pops.

Now every year, the High Street banks looks set to create hundreds of ‘salary plus bonus’ millionaires, and have to tell everyone about. That reputational risk is starting to look like a very significant business risk as well.

There are two big questions about this. The first is whether the public ever come to terms with this situation. For the moment, they are told that banks are not lending, they see many of these institutions posting loses including state owned RBS, and yet they see these extraordinary levels of salaries.

Even many Conservative supporters may raise an eyebrow as the Prime Minister, Chancellor and Mayor of London all attempt to resist a cap on bonuses from the European Parliament that would limit them to no greater than basic salary. Many experts regard this as far too blunt an instrument which could actually force banks to increase salaries but also leave them with much less flexibility in their operations and thus be able to lend much less. But such subtleties are likely to be lost on the public.

Investors may see a little more nuance and be a little more forgiving, if bonuses are accompanied by better share price performance. But many fear that the relationship between bank senior management and share owners (and the British state in two cases) is also completely out of kilter. What is paid out in bonuses to staff does not get paid out in dividend.

Are these high salaries really a necessary running cost necessary to keep banks competitive? What is increasingly obvious is that public perceptions and hostility to banks could undermine competitiveness by undermining banks’ reputations.

The Institute of Directors director general Simon Walker summed things up very neatly recently.

He said: “Thousands of people in those two companies alone earn more even than the Prime Minister. This is in scandal-hit companies who have had a far from successful year.”

Perhaps even pointedly, F&C Asset Management has written to the chairmen of nearly 60 financial firms warning that “the public perception of unjustified excessive pay can create long-term reputational damage”.

That should be a worry for everyone, even for some of those million pound performers.

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