Bailed-Out AIB Said to Eye New Executive Bonus Plan

Allied Irish Banks Plc, which needed a 21 billion-euro ($28.7 billion) taxpayer bailout, has approached the government about setting up an incentive plan to retain top executives before the government starts selling the lender, according to three people with knowledge of the matter.

Chairman David Hodgkinson has led exploratory talks with Finance Ministry officials on reintroducing long-term awards for senior staff at the bank when it returns to profit, according to one of the people, who asked not to be identified, as the matter is private. Salaries were capped and bonuses banned at the Dublin-based lender after its rescue.

Niamh Hennessy, an Allied Irish spokeswoman, declined to comment on the matter. In an e-mail response to questions, the Finance Ministry declined to comment on the approach from the bank, and said it has no plans to change compensation policy in bailed-out banks.

Chief Executive Officer David Duffy, in the job for just over two years, plans to return the bank to profit this year for the first time since 2009 as he completes more than 2,500 job cuts, rebuilds lending margins and bad-loan losses ease. The bank’s board will probably start talks with Duffy in coming months about extending his existing three-year contract to December by another three years, according to one of the people.

Sale Stake

Finance Minister Michael Noonan said on Jan. 23 the government may sell a stake in the bank before the nation’s next scheduled election in 2016. Allied Irish’s bailout accounted for almost a third of Ireland’s 64 billion-euro rescue of its financial system after the worst real estate collapse in Western Europe.

“The number one priority for AIB is to get itself off the backs of the Irish public after it was foisted on them when it collapsed,” said Ciaran Lynch, a lawmaker with junior government partner, the Labour Party, and chairman of the Irish parliament’s finance committee. “Any discussions on bonuses and remuneration in achieving this goal beggars belief and is unacceptable.”

Duffy, a former executive with South Africa’s Standard Bank Group Ltd., joined Allied Irish in December 2011 on a 500,000 euro-a-year salary, in line with a state-imposed salary cap on rescued banks. He took a 15 percent pay cut the following year as he cut compensation of senior bank executives.

Pay Report

Allied Irish has replaced its entire board and most of its senior executives since its initial bailout in 2009. Eleven bank executives had total compensation between 400,000 euros and the 500,000-euro cap in 2012, according to a government-commissioned bankers’ pay report by consultants Mercer, published in March. Some 116 executives at the lender were earning above 400,000 euros in 2008.

Irish senior bank executive salaries are generally below European peers and publicly quoted Irish companies, the report said. While it highlighted a reintroduction of long-term incentives as an option in the future, Noonan ignored this as he published the report on March 12 with an order that lenders cut compensation costs by as much as 10 percent.

“Each of the banks has now met the target,” Paul Bolger, a spokesman for the Finance Ministry said, in the e-mail statement. “There has been no change in policy since then nor are there any plans to do so.”

Share Plan

The Mercer report said incentives could be put in place “when the institutions look likely to return to profitability and hence have the opportunity of coming out of state ownership.” Plans could be of shares, share-related securities or contingent capital instruments, it said.

While incentive plans align the interests of bank executives and taxpayers, “there is likely to be a significant negative public reaction” to their reintroduction, Mercer said.

Any Allied Irish plan would likely be share based and linked to government-set targets for profitability and taxpayer returns, said one of the people. The bank’s rose 3.9 percent to 14 cents as of 2:25 p.m. in Dublin trading.

The bank said on Nov. 14 it has seen signs of stabilization in the quality of the bank’s loans and that the pace of growth in customer arrears was slowing. Its loan impairment charge fell 16 percent in the first half of last year to 744 million euros.

The lender’s net interest margin, the difference between the rate at which it borrowers and lends to customers, widened to more than 1.4 percent in the third quarter, excluding government guarantee costs, it said in November.

Duffy, 52, has said he will be aiming for a return on equity of between 8 percent and 12 percent in the medium term. ROE is a measure of profitability.

“Minister Noonan needs to be unambiguous in his response to these highly paid executives that a return to a bonus system is not on the table,” said Pearse Doherty, opposition party Sinn Fein’s finance spokesman.

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