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US Caps on Compensation Wednesday, February 04, 2009

Today it was reported that President Obama and the US Government was expected to impose caps on "executive" pay at organisations that accepted Government bailout funds. It was suggested that these conditions are not expected to be retrospective on those firms that have already received bailout monies [which will be a great relief to those firms!]. However the cap is on cash compensation - it is specifically proposed that any compensation over $500,000 would have to be paid in company shares which could not vest until all bailout monies had been refunded to the Government.

The reports do seem to focus on the banking sector, albeit it would seem reasonable that such provisions apply to any firm that required Government money.

Salary caps are always highly contentious with arguments usually polarising into accusations of greedy bosses versus the importance of paying the "market rate" to attract the best talent. However the debate has strongly swung in favour of caps because the recent downfall/demise of many large institutions are being directly attributed to incumbent executives who are seen to be the cause or at some fault. Consequently, there is no public support for "rewarding" failure especially with taxpayer money, especially when the compensation sums involved are colossal in contrast to average earnings. Throw in envy, plus people losing their jobs through no fault of their own but as a consequence of an economic slump accompanied by a contraction in available bank credit, and you have an populist and moral tidal wave to sweep away counter-arguments.

Defenders of unconstrained pay, myself included, will now get to prove or lose their arguments which mainly revolve around the belief that locations/industries with caps will be disadvantaged as the best talent will be drawn to locations without such caps [assuming jobs still exist there].

An example often quoted to support this contention is football, highlighting that the English Premiership regularly wins out in the battle for global talent because of the rewards on offer to players, with the consequence that the teams in the league regularly compete at the top of European/World football.

However, is it probable that the World's biggest firms will fail to lure the best talent, since landing a senior role at these firms is still a considerable "prize"? Even in football, recent failed transfer events at Manchester City showed money doesn't always work in prising away talent from a "big club". Moreover executives still need jobs and there are far fewer firms around that can offer "big" jobs or who are willing to pay "over-the-top" compensation in a recessionary environment. Hence, supply may be growing whilst demand is reversing, thereby automatically pushing down pay, especially when those hiring are increasingly sceptical about anyone claiming superhuman management powers, given the rapid fall from grace of so many former business stars.

The worst outcome of introducing the caps would be that they deters executives from seeking the very help that may be right for their companies. Whilst board members have a duty to their companies and shareholders, they are clearly conflicted given the personal ramifications for their own wealth. Of course, they could choose to move on and perhaps should in circumstances that their company needs a bailout. Yet career choices like that are rarely made dispassionately.

Depending upon how "executive" is defined e.g. main board directors only, some executives may follow Bob Diamond's example, who for years refused a seat on the main board at Barclays to avoid having to disclose his earnings, or so it is widely believed. It was undeniable that he had a major role in running a core part of the Bank despite not being a main board member, but who was in effect a shadow director. Some companies may well look at such devices to circumvent rules, especially if main board directors find themselves underpaid relative to considerable numbers of their employees, as would probably be the case in a number of banks.

Of course, if "executive" is widened to any senior manager or employee, then things could really be shaken up, especially since those firms who took money early would be free of any such constraints and thus able to poach talent with offers of higher pay from those who arrived at the trough later. And yes, that would definitely happen.

Pay aside, executives are clearly deterred by the prospect of Government oversight and intervention in running the companies if they accept bailout funds. Barclays demonstrated that the executives were much happier paying a higher price for capital instead of accepting UK Government money. Yet, increasing numbers of companies who are struggling to refinance their operations are jumping on the emotional blackmail bandwagon and demanding Government aid. Perhaps imposing caps will restore some balance by inflicting some personal pain on the wealth of the executives making the demands.

However, perhaps the most interesting thing is that the proposal stops short of capping all forms of compensation and allows executives to be paid in shares. Given that bank shares are in the doldrums, a $500,000 bonus in shares buys you considerably more shares than it did up until recently. Assuming a bailout does ensure a company's survival, then the executives forced to forgo cash may get to make even bigger sums if their shares manage to recover even some of their lost glories, which won't make for pretty news headlines e.g Lloyds is trading at 95p today from a low of 44p only a couple of weeks ago which would have double an executives money, but several fold returns are not inconceivable. Of course, you could contend that executives who nurse a company back to health are deserving of this, but against a backdrop of Government funded survival and the possibility of an economic tide lifting all companies in due course, the public may well feel aggrieved with such an outcome.

Labels: Bank, Barclays plc, Financial Services Compensation Scheme, salary caps

posted by John Wilson @ 1:12 PM Permanent Link ,

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Barclays - the bitter pill for Abu Dhabi Thursday, January 22, 2009

Details have emerged that the Abu Dhabi Royal Family inserted an anti-dilution clause alongside their investment in Barclays, which would re-price the shares issued to them in the event that new capital was raised within 9 months at a lower share price. e.g. if £100m bought 100m shares at £1, then if shares were subsequently issued at 50p then they would automatically receive an additional 100m shares [£100m divided by 50p].

Such a clause is relatively common in private placings and Angel/VC rounds of fund raising. It's purpose is simply to protect the investor from subsequent investors being offered better terms, rather than being a device to deter further capital injections. However, the rapid deterioration in Barclays situation and market conditions, with corresponding slump in share price from 153p to under 70p, would prompt a significant repricing of the Abu Dhabi stake were new capital raised at such levels, with the consequence they would probably end up with a majority stake.

This now presents Barclays with a considerable problem - if they conclude that they do need more capital, new investors would face the prospect of automatically being a minority shareholder in the shadow of the Adu Dhabi control. This is likely to deter some sources of new capital and hence frustrate Barclays efforts to the extent that the only source of new funds may be the Abu Dhabi's themselves.

Whilst Abu Dhabi could sit back in the expectation that the UK Government would be obliged to bail out Barclays, I suspect that the UK Government would be forced to nationalise the bank rather than simply inject fresh capital, given that it would be political suicide to be seen to be using taxpayers money to hand control of the bank to another sovereign state.

Nationalisation would clearly be a dramatic step and materially damage relations with Abu Dhabi, given it would wipe out much, if not all, of their investment. However, the idea of nationalising a major UK bank is openly debated and advocated in some serious quarters, albeit RBS and Lloyds are most commonly the subjects of such discussion in this context.

Hence, Abu Dhabi may now find themselves having to consider the prospect of having to [unwillingly] provide more capital to prop up their ailing investment or else waive their anti-dilution rights.

Labels: Abu Dhabi, Barclays, Barclays plc

posted by John Wilson @ 9:01 AM Permanent Link ,

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Barclays trying to undermine Nomura Monday, September 29, 2008

Image via WikipediaAfter buying the US arm of Lehman, Barclays looked over the European business but apparently declined to bid and so it was bought by Nomura. Buying all of Lehman in Europe was always going to less appealing to Barclays given the considerable overlap that would have existed between Lehman and Barclays Capital, especially in Fixed Income. However, demonstrating why Nomura had to put in place large retention payments for Lehman staff, Barclays has apparently been attempting to cherry pick staff in London - always a much cheaper alternate than buying a business.

Whilst perfectly legitimate, you could understand if Nomura might be irritated by BarCap's move. Whilst the acquisition was not altruistic, it has saved a considerable number of City jobs and will need the best talent to stay, if it is to rebuild the business.

Labels: Barclays plc, Lehman Brothers, Nomura Group

posted by John Wilson @ 10:59 AM Permanent Link ,

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Barclays Global Investors takes a hit on liquidity funds Thursday, August 07, 2008

Included in Barclays Bank results today was the news, highlighted by the FT, that profits before tax at Barclays Global Investors, the investment management business, fell 32 per cent to £265m, after charges of £196m, which the bank said were related to “selective support of liquidity products” to help clients.

This is a similar tale to that of firms like Legg Mason, who've wished to avoid "breaking the buck" on their money funds i.e. reporting a capital loss to investors. The support has normally taken the form of buying certain assets, usually illiquid ones, from the funds at above market value and absorbing the loss.

I've commented on this before here, here and here.

Will someone break ranks and admit that these are risky investments or will these funds continue to be "protected" by asset managers, in which case at what point will they be forced by regulators to capitalise accordingly?