U.K. Bank CEO Pay Tied to 'Surprisingly Low' Goals They Can Beat

  • Barclays, RBS CEOs’ personal goals less stringent than banks’
  • Disparity noted in report by Autonomous Research analysts

Executives at the U.K.’s biggest banks are still going to get rewarded even if they once again miss their financial targets.

Barclays Plc, Royal Bank of Scotland Group Plc, and Standard Chartered Plc have set less stringent criteria for top managers to get their incentive awards than the official targets presented to investors, according to the lenders’ annual reports and Autonomous Research LLP

Barclays Chief Executive Officer Jes Staley has a “surprisingly low” return on equity goal linked to his long-term incentive plan, while RBS CEO Ross McEwan’s personal target for cutting costs is less demanding than the bank’s goal, analysts led by Manus Costello said in a March 13 report. Standard Chartered boss Bill Winters will still get a quarter of the profitability-linked part of his award even if he generates a return of less than 5 percent, about half the minimum performance investors typically demand from a bank.

“We find it interesting that, implicitly, the board considers single-digit, sub-cost of equity return targets to be sufficiently stretching,” Costello said of the banks. “It is interesting to compare these to the stated financial targets presented to the market.”

Profitability Concerns

Bank pay has been a near-constant source of political outrage in the U.K. since the financial crisis amid growing inequality and taxpayers’ inability to recoup the cost of bank bailouts. Regulators have flagged poor profitability a concern for financial stability, while investors have shunned the sector as banks repeatedly back away from return and cost targets, blaming poor economic growth, low interest rates and higher capital requirements. 

Banks worldwide have responded to pay scrutiny by deferring a greater portion of compensation, and tying more awards to specific performance targets. Still, they’ve sought to reward executives for showing some progress, even when it falls short of what they’ve laid out to investors.

Spokesmen for Barclays and RBS declined to comment, while Standard Chartered said its targets were “appropriately challenging.”

At Barclays, Staley will be awarded a quarter of the profitability-linked portion of his long-term incentive plan, or LTIP, if he achieves an average return on tangible equity of 7.5 percent in the three years to 2019, with the maximum payout triggered if he gets the firm to a 9.5 percent return. Last year the bank made an average return on tangible equity of 3.6 percent.

The pay “target is surprisingly low, especially given management’s propensity to talk about ‘double digit’ core returns,” Costello wrote in the report. “We note that the equivalent return target for the chief financial officer has actually reduced from 10 percent in last year’s LTIP round,” referring to Barclays’s CFO Tushar Morzaria.

Read more: European banks push back targets

Staley can earn a potential 3.3 million pounds ($4 million) from his LTIP, a quarter of which is linked to returns, with the remainder judged on criteria such as capital, risk, costs and assorted “soft” factors such as employee engagement.

Barclays softened its financial guidance last year, cutting its return on equity target to “double-digit” in the “medium term” from a previous goal of 11 percent by the end of 2016. The firm has since become more vague, saying it wants overall group returns to converge with so-called core performance after it closes its bad bank. Core ROTE was 9.4 percent last year, while executives said they should be able to get to double digits.

While HSBC Holdings Plc CEO Stuart Gulliver must hit his firm’s stated 10 percent ROE target to get the full portion of his award, he can get some payout for a return as low as 7 percent.

RBS has said it will pay out the portion of CEO McEwan’s incentive plan linked to the bank’s cost-to-income ratio if he can get the measure under 56 percent by 2019, whereas the bank’s official target is less than 50 percent by 2020, only one year later. The measure was 66 percent in 2016.

‘Very Stretching’

Even when taking into account that the cost-to-income portion of the award is all or nothing, “it is nonetheless surprising and would seem to imply either a marked improvement in cost efficiency is assumed at the back end of the planning period, or that the board feels that the stated target is very stretching and may incentivize risk to an undesired level,” Costello said.

Asia-focused Standard Chartered has said lower growth rates in Hong Kong and Singapore meant reaching its profitability goal was “likely to take longer than we had hoped.” The firm had been targeting an 8 percent return on equity by 2018, rising to 10 percent by 2020. The bank made an underlying return of 0.3 percent in 2016.

Still, Winters stands to get the maximum payout under the profitability slice of his LTIP, which is about a third of the total, if he hits a return on tangible equity of about 9 percent. Costello said this was “somewhat surprising” considering it was still less than the minimum level of return demanded by investors of about 10 percent, known as the cost of equity. 

Winters can still get a quarter of the return-linked portion of his LTIP even if he generates a return of about 5 percent in 2019, excluding restructuring charges and one-time items.

“The remuneration committee felt that 2017-9 return target of 5 to 8 percent is appropriately challenging given the 2016 return of 0.3 percent and uncertain outlook,” Standard Chartered spokesman Simon Kutner said in an email. The committee “is clear that intent remains to deliver sustainably higher returns as soon as possible.”

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