Friday, April 20, 2012

Case of Barclays and Bob Diamond

For one reason or another, Barclays somehow manages to capture business headlines. This time it’s about the Chief Executive of the bank Mr Bob Diamond and its other executives. Mr Diamond has successfully lead Barclays since October 2010 and for his services in 2011, he earned a remuneration of $2.16 million in salary, $4.32 million in bonuses, $3.6 million in long term incentive payments. He has not yet received his yearly bonus and in the current environment, it is unlikely that he will get the full amount. The bonuses were supposed to be paid in shares over three years in equal yearly installments.

The salary structure enables Mr Diamond to earn nearly four times more in bonuses and incentives. This calculation is based on very simple estimates. To calculate the actual value, we will have to find out the present value of the future shares he will receive (bonus payment) in the coming years. The Pensions and Investors Research Consultants (Pirc) revealed to Barclays shareholders that the net present value of his remuneration package is approximately $18.88 million, nine times more than his salary.
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It should be noted however, that the current uncertain economic environment makes it almost impossible to predict the present value of a Barclays shares. In 2011 alone, the bank has seen a decline of 26% in share value.

(Europe has Barclays and Mr Bob Diamond, US has Citigroup and Mr Vikram Pandit. Find out who is more greedy? Read this new post and comment. )

The shareholders feel that if the bank cannot meet its target and fails to improve its share value then its chief executive does not deserve any bonus. Standard Life, Fidelity, Aviva and Scottish Widows who represent more than 6% of Barclay’s shares have decided to protest over Mr Diamond’s bonus. Many are quoting Lloyds, a leading British retail banker, as an example who has cut $3.2 million in bonuses.   

Barclays, unlike Lloyds, is basically an investment bank and therefore it pays more to its investment bankers. The shareholders feel that it pays more than what is required or considered an industry standard. The board members consider Barclays as a premier investment banks therefore such payments are justified. The shareholders believe that the bank should settle for less. Mr Diamond, Marcus Agius, the Chairman and Alison Carnwarth the head of remuneration committee are all investment bankers.

The standoff between shareholders and the board continued for about a week until the board decided to change its executive bonus plan, just days before the shareholder’s meeting. The new bonus plan focuses on Mr Diamond and Mr Chris Lucas, the finance director. From now onwards, they will receive only half of their agreed bonuses’ yearly installments.

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If however, they are able to turn the bank around i.e. Barclays’ return on equity becomes more than its cost of equity, then they will receive full bonuses that year. So the bonuses have been tied to the bank’s performance. The current target is very difficult to achieve and it is highly unlikely that they will be able to do it this year. Currently the bank’s return on equity is 6.6% while its cost of equity is 11.5%.

How does this work?

Their bonuses are not being completely cancelled but are “postponed”.
  • If they fail to achieve the target for this year then they will only get half of their bonus.
    • (i.e. Mr Diamond will get $720,000 of $1,440,000)
  • If they fail to achieve the target in the second year then they will receive half of their bonus.
    • (i.e. Mr Diamond will get $720,000 of $1,440,000)
  • If they fail to receive the targets on third year as well then they will receive the Full Bonus PLUS two unpaid half bonuses of previous years.
    • (i.e. Mr Diamond will get full $1,440,000 for this year PLUS $720,000 AND $720,000 unpaid of previous two years)

The deal will then roll on for the next three years. Its a win-win for Mr Diamond. If he is able to achieve his targets then he will get the reward 'now'. If he fails, then he will get half of it now and half of it 'later'. So in the end, he will eventually get his bonus whether shareholders and investors like it or not. 

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