Friday, February 10, 2012

Bob Diamond, Barclays and Bankers Average Pay

CBI Photostream

Bob Diamond waxed lyrical on the issue of bankers pay, again, during the recent Barclays $BARC results presentation. Quoting directly from the results presentation

‘“The 25 per cent reduction in performance-related pay at Barclays was much greater than the 2 per cent fall in profit. We placed a cap on cash bonuses of £65,000, and more pay is now deferred and paid in shares so that employees are even better aligned with shareholders."
“This represents a significant change not just in structure but in quantum, as you would expect in a year where income and profits were adversely impacted by the economic environment... as you would expect, we give a great deal of thought each year to getting the balance right between being responsible and remaining competitive. That’s exactly what our shareholders expect of us.”

Now, I know what you are thinking. However, this isn’t going to turn into a moralistic rant about bankers pay and how it should be guided by some sort of invisible conception of social justice. I’m not even going to comment on the issue of how Barclays has hiked basic pay over the last few years, so as to decrease the impact of any bonus cutting, even whilst shareholders have lost 26.4%, 11.1% and 70% on a one, two and five year basis respectively.

The Real Issue Over Bankers Pay

My issue is a far more relevant one. Specifically, at what point are we –as investors- going to start looking at the banks in the same way that we look at other companies?

I research a lot of companies, and I listen to a lot of conference calls. Over the last few years, the main story has been one of cost cutting and following a severe recession leading into a slow gradual recovery whilst corporations hoard cash and are reluctant to increase the fixed cost base with hiring. It’s part of a CEO’s job to cut costs for the shareholders. It helps increase margins and ultimately future cash flows to shareholders. That is why shareholders pay CEO’s. They do not pay them so that they can indulge in gaming every single piece of salary and bonus out of the company whilst exposing shareholders and taxpayers to future risk.

Barclays Pay for Performance or for How the Economy is Doing?

So, consider the following with Barclays. Most of the recovery in share price since end 2008/start 2009 (which is the only period in which you could have bought and still be up on Barclays today) is in fact due to the substantial Quantitative Easing programs of Central Banks worldwide and the concomitant risks that taxpayers have had to take on board.

Similarly, it seems that banks can only really make money when Governments are buying up and supporting the underlying troubled assets that the banks were holding. Furthermore, we are hearing all sorts of excuses (see above) by the banks alluding to the ‘economic environment’. Everything seems to boil down to macro factors and profitability being directional with the economy.

All of which leads me to ask, at what point in all of this has the discretionary element of bankers ‘skilful’ input been a factor? In other words, it seems that banks performance is irrespective of bankers pay. So surely, Bob Diamond can learn something from this and carry on cutting bonuses. It won’t make a difference to performance anyway.

 However, it will be in the shareholders interests, of which, he is supposed to be representing

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