Confusion over how much the chief executive of Barclays was ‘paid’ last year can’t hide that on almost every measure the bank’s performance is getting worse.
The first problem with Diamond’s pay is working out exactly how much he was actually paid. The BBC and The Times went in low with £6.3m, and The Guardian went a little higher with £17m. The Daily Mail raised that to £24m (labelling the payouts a ‘day of shame’ for the banks), before the FT went all in with £25m.
The danger with some of these loftier numbers is that they conflate pay that was awarded in 2011 with deferred bonuses and long-term incentive schemes awarded in previous years but which paid out last year, and the final figure is (perhaps not unintentionally) confused…
Let’s break Diamond’s pay into the two buckets of “awarded” and “paid out”. His awarded pay for last year was £6.3m, including a salary of £1.35m, an annual bonus of £2.7m (deferred and paid in shares), and a long-term incentive award of £2.25m that won’t pay out (if at all) for another three years. In addition, he received £675,000 towards his pension scheme, and £474,000 in other benefits (including the cost of seeking financial advice as to what to do with all of this money). So all in, his awarded “compensation” for 2011 was £7.4m.
In addition, three separate deferred awards from previous years paid out during 2011, which bumps up the overall number nicely: a performance plan that ran from 2006 to 2008, paid out £3.7m; the equivalent plan from 2008 to 2010 paid out £1.1m; and an executive share award scheme also paid out £7.8m. So in total he received another £12.6m last year from previously awarded schemes.
Add in £5.75m that Barclays paid on Diamond’s behalf for “tax equalisation” (to offset the negative tax effect of his relocation from the US to the UK to take up the role of group chief executive) and you get to £24.7m, or £25.8m including his pension and benefits. Let’s call it £20m excluding the curious tax payment.
The problem here is that by combining previously-awarded bonuses that paid out last year with bonuses that were awarded last year, you end up double-counting. If you are going to include the £12.6m in deferred awards that paid out last year as part of his “pay” for 2011, then you have to take out £4.95m of similar long-term bonuses awarded in 2011 out of last year’s numbers.
That brings us down to £15.1m of total “pay” (how much money hit his bank account before tax), of which £12.6m is from previous years, and £2.5m was awarded and paid in 2011 in the form of salary, pensions and benefits.
Paying for performance?
Now that we know he was “awarded” last year (£7.4m) and what he received in total pay (£15.1m, plus the ‘tax equalisation’), let’s test the statement by Alison Carnwath, chairman of the Barclays remuneration committee, that “it is essential that we reward our people appropriately and that their pay reflects performance”.
There are two metrics we can use here: how does it compare with his predecessor as chief executive, John Varley? And how does it compare with Barclays’ performance?
In his last three years as chief executive, Varley had the misfortune to be in charge during the financial crisis and its immediate aftermath. In each of 2008 and 2009 he did not take a bonus or long-term share award, and earned £1.1m in salary and benefits (plus pension contributions). In his final year (2010), Varley earned £4.1m, including a £1.1m salary, £2.75m in bonuses, £206,000 in pension contributions and £54,000 in benefits. He didn’t qualify for a long-term incentive scheme because he was stepping down.
The equivalent figure for Diamond in 2011 (ie. excluding his LTIP) was £5.2m, which begs the question why Diamond should earn 26% more than his predecessor for doing the same job, and arguably doing it worse?
For good measure, this is three times more than the equivalent figure (excluding LTIP) for Stephen Hester over at RBS, who waived his bonus and received a slightly more puritan £1.65m in salary, benefits and pension contributions last year (down 55% on 2010). Hester’s total awarded pay last year was £3.3m, just over half what Diamond received.
So how does this tally with performance? On almost every metric, Barclays’ performance in 2011 was worse than in 2010:
- Return on equity fell from 7.2% to 5.8%
- Return on risk weighted assets fell from 1.12% to 1.01%
- Return on assets fell from 0.31% to 0.25%
- Headline pretax profits fell by 2%
- Net profits dropped 13%
- Shares in Barclays fell by a third
On the plus side, the bank’s core Tier 1 capital ratio increased from 10.8% to 11.0%.
Barclays may argue that Diamond’s awarded pay in 2011 fell by 30% compared with the £9m he was awarded in 2010, but this comparison is disingenuous because Diamond was doing a different job in 2010. The bank might also point out that he only received 80% of his potential bonus, and only one third of his potential LTIP.
But the unfortunate fact remains that the pay for the role of chief executive of a bank that hasn’t beaten its cost of equity for three years appears to be going up. Whichever way you look at that – and whatever numbers you come up with – that just doesn’t smell right.