Barclays Report Finds Bonuses Incapable of Justification

Barclays Plc, the U.K.’s second-largest lender by assets, paid investment bankers bonuses “incapable of justification” as employees focused on revenue at the expense of clients, according to an internal report.

In the report commissioned by the bank after it was fined 290 million pounds ($428 million) for manipulating Libor in June, Rothschild vice chairman Anthony Salz criticized the lender for failings in its culture and urged it to improve its openness and transparency. In parts of the company, there was “a sense that senior management did not want to hear bad news,” which “contributed to a reluctance to escalate issues of concern,” according to the 236-page report published today.

“Based on our interviews, we could not avoid concluding that pay contributed significantly to a sense among a few that they were somehow unaffected by the ordinary rules” Salz wrote. “A few investment bankers seemed to lose a sense of proportion and humility.”

Antony Jenkins, 51, who replaced Robert Diamond as chief executive officer in August, is seeking to rein in pay and boost profits to shareholders to help restore investor confidence in the wake of the Libor scandal. The London-based bank plans to eliminate some 3,700 jobs this year after posting an annual loss of 1.7 billion pounds.

Barclays fell 2.8 percent to 289.3 pence in London. The stock has increased 10.3 percent this year, making it the best performer among Britain’s five biggest lenders.

‘Reputational Problems’

“We concluded that the reputational problems for Barclays stem in part from the perception that, at least in the U.K., some bankers have appeared oblivious to reality,” Salz wrote. “Despite billions of pounds of liquidity support from taxpayers, many senior bankers seemed still to be arguing that they deserved their pre-crisis levels of pay.”

Barclays paid its top 70 executives “consistently and significantly above” the industry norm, according to the report. Managing directors at Barclays’s investment bank received base pay of about 150,000 pounds to 300,000 pounds, as well as an average bonus of about 70 percent of their salary in 2012. Some senior employees received bonuses equivalent to more than double their base pay, it showed.

‘Uncomfortable Reading’

“They have singled out the top 70 managers for being paid too much,” said Ian Gordon, an analyst at Investec Plc in London with a buy rating on the bank. “Most people would agree with that. The good news for Barclays shareholders is this doesn’t appear to change anything.”

The bank’s consumer unit, which Jenkins ran before becoming CEO, said in October it will stop awarding bonuses to employees based on sales and instead focus on customer satisfaction.

“The report makes for uncomfortable reading in parts,” Barclays Chairman David Walker said in an e-mailed statement. “Our initial review of the report’s recommendations is that they are substantially aligned with work already progressing.”

Jenkins and Walker both declined to be interviewed about the report, John McGuinness, a London-based spokesman for the lender, said by telephone.

Barclays Fines

Focusing pay on revenues encouraged misselling of products such as the wrongly sold loans insurance, the report said.

Barclays’s revenues from so-called payment-protection insurance, net of claims and provisions for alleged misselling, was about 940 million pounds in the ten years through 2012, it said. One undisclosed sales person was found earning 2 1/2 times more commission for selling a loan with PPI than without, according to the report.

Barclays paid 70.8 million pounds in fines to the Financial Services Authority in the three years through 2012, according to the report. It set aside 2.6 billion pounds to compensate clients who were wrongly sold PPI.

“Financial contribution was paramount,” Salz wrote. “In both the retail bank and the investment bank, the success stories were largely attached to strong personalities, successful sellers and revenue earners and individuals who demonstrated cleverness and an ability to win.”

The lender’s structured capital-markets business, or SCM, which U.K. lawmaker Nigel Lawson described as “a fancy name for tax avoidance,” in 2007 made 1.19 billion pounds of revenue for the lender. The division, which hasn’t before reported its revenue, “adopted a policy of transparency” with the U.K.’s tax office, according to the report.

‘Highly Abusive’

SCM, which Jenkins said he plans to close, was behind two tax loopholes the U.K. Treasury called “highly abusive” last year, depriving the public of more than 500 million pounds.

“We consider that this is another example of Barclays’s failure to assess adequately the reputational damage of its actions, inclining to rationalise its behaviour on technical arguments rather than reaching a broader judgment of reasonable public expectations,” Salz wrote in the report. “In doing so, it further eroded trust in Barclays.”

Salz also criticized the bank’s dealings with regulators as being focused on the letter rather than the spirit of the law.

That “institutional cleverness,” he wrote, “stretched relationships with regulators and resulted in them and the market questioning some of Barclays’ financial information,’’ such as its valuations of illiquid assets and control systems.

Current Investigations

Barclays is being investigated by the U.K.’s Serious Fraud Office for fees it paid in 2008 to Qatar’s sovereign-wealth fund as the lender sought money to avoid a government bailout. Salz said in a telephone interview today that the report didn’t cover current investigations because “we were never going to do enough to be useful,” he said.

“We were not asked in our review to personalize findings or place blame on particular individuals,” Salz said. “We tried to link the failings to recommendations to change and find a blueprint for the future rather than spend too much time looking at the past.”

The review cost 17 million pounds, including costs for legal advice paid by Barclays and 1.5 million pounds paid to Rothschild for Salz’s time. Salz wasn’t paid directly by Barclays.

Pensions & Investment Research Consultants Ltd., a corporate-governance adviser based in London, said in an e-mailed statement following today’s report that “an obvious conclusion is that Barclays has become too big to understand.”