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Barclays’ bonuses are out of whack with shareholder returns

If Barclays’ targets are to be meaningful, shouldn’t the failure to meet them be reflected in Bob Diamond’s bonus?

Would a boss who describes his firm’s financial returns as “unacceptable” then accept a bonus?

In the case of Bob Diamond, we’ll have to wait to find out. The Barclays chief executive is refusing to talk about his own rewards on the day of the bank’s annual results. Those results, however, are dominated by a single statistic: a return on shareholders’ equity of 6.6% for 2011, down from 6.8% last year. That outcome is miles away from Diamond’s target of 13% by 2013. Indeed, the man himself concedes the race is as good as lost already. The target has been downgraded to an aspiration “over time”.

Most investors regarded the 13%-by-2013 goal as hot air anyway, which is why the market has not reacted badly to Diamond’s admission: Barclays share price is up 2%. All the same, the returns figure raises a straightforward question: if these targets are to be meaningful, shouldn’t the failure to meet them be reflected in the boss’s bonus?

One assumes it will be since Barclays’ pay report last year specifically mentioned return on equity as one of the “key financial metrics” that would determine bonuses for executive directors. But until the numbers are published in the annual report, one can’t know for certain. Today’s reticence looks evasive.

Many shareholders are struggling to spot any evidence of a shift in Barclays’ attitude to bonuses — or, to use bankers’ preferred term, variable pay. Profits at Barclays Capital, the investment banking division, indeed varied greatly from the previous year — they collapsed by a third to £2.96bn. The bonus pool at BarCap is also down by a third, from £2.26bn to £1.54bn.

Barclays may regard that as evidence of the bonus system working as intended — ie, a stride-for-stride relationship between profits and bonuses. But, come on, that assumes you started from the right place. Nobody, surely, would claim that. Barclays outshone RBS and Lloyds and others during the big banking blow-up, but that’s nothing to boast about. Barclays is still a bank that is not even close to earning returns in excess of its cost of capital.

This is now the third year in a row of sub-par returns. There, of course, reasons why 13% remains a distant dream — “worse than expected macroeconomic conditions, in addition to new regulatory constraints,” explained Diamond. Yes, but another reason is Barclays unwillingness, or inability, to make the cultural shift to align properly the rewards of employees at Barclays Capital, the bank’s biggest engine, with the prosperity of Barclays shareholders.

Diamond cites the need to remain competitive — and claims his shareholders are supportive. But here’s news for you, Bob: some of your big investors are revolting.

Robert Talbut, chairman of the investment committee at the Association of British Insurers (and thus an influential voice), says: “Whilst overall bonus levels at Barclays have been reduced, for Barclays Capital, this reduction is only in line with the fall in profit before tax. This appears to be very close to business as usual. It is not the signal of the change required in order to improve the investment case.”

Talbut is right. Barclays’ relationship with bonuses is barmy: it is paying out big sums on the assumption that acceptable returns may one day appear. That is not how the capitalism game is meant to work. Deliver the returns for shareholders before you fill your boots, Bob. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds