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Banking: Executive Pay

Volume 708: debated on Thursday 5 March 2009

Question

Asked By

To ask Her Majesty’s Government whether they will place an annual limit of £500,000 on the pay of executives in financial institutions in receipt of substantial public funding.

My Lords, at the time of making their investment, the Government agreed a range of conditions with banks in receipt of public capital, including in respect of executive remuneration. The Government are clear that remuneration policies must be based on long-term sustainable performance in the interests of all shareholders, taking proper account of risk. The Government have been very clear that bank directors must bring an end to the short-term bonus culture in the banking sector.

My Lords, I thank my noble friend for that reply. My proposal takes a leaf out of President Obama’s book. He is enacting a pay cap of $500,000 a year for executives in financial institutions bailed out by the taxpayer. My proposal is somewhat more generous. Does my noble friend agree with the logic of that? It is that, if the taxpayer is now to take all the risks, top executives, who would thereby carry no risk, should not take the lion’s share of the reward? Secondly, does he agree that it is now vital to introduce stakeholder governance and public interest criteria into the private sector, including a remit to reverse the upward spiral of top pay relative to the average, a principle which also needs to be part of the international agenda on multinational banks and tax havens?

My Lords, all shareholders take risks which relate to equity capital, and the Government, through UKFI, stand alongside other shareholders in that respect. We have been very clear that we find the level and structure of reward in the banking sector unacceptable. We have invited Sir David Walker to lead a report in this area. From my perspective, one of the things that it should address is the insidious influence of external benchmarking and comparators by so-called benefit consultants. There needs to be much more awareness of internal comparators and perceived fairness. The rewards and remuneration for those at the top of the organisation have simply become detached from those of their colleagues and from reality. There should be further disclosure, and there are important roles for shareholders.

I sense a Sir Fred Goodwin question coming fairly soon. It is interesting that, as far as I am aware, not a single institutional shareholder has raised a single question about Sir Fred Goodwin’s pension or the terms of his departure. That is the core of the issue. They were the shareholders when the bank got into difficulty; they were the board of directors when that agreement was reached.

My Lords, when was the first time that the Minister or one of his ministerial colleagues consulted the Treasury Solicitor or external legal advisers about the pay and pensions of senior bankers, and what was the substance of the advice that they received?

My Lords, pay and pensions for directors of a bank are a matter for the directors of that bank.

My Lords, does the Minister agree that it is not just a question of payment? Given the ingenuity of the Artful Dodgers who sit on the boards of subsidised banks, is it not the total remuneration package which needs to be regulated?

My Lords, I agree with you, sir, and fully endorse your observation. It is worth noting that Sir Fred Goodwin earned over £11 million in his last three years at the Royal Bank of Scotland, a figure which was approved by the board of directors and the shareholders.

My Lords, leaving aside those who seek to blame the wrong person here, rather than the bank, is there any truth that in the Fred Goodwin case the action was taken not by a contract but by one or two directors, not even the whole board? If that is true, is there an opportunity to consider—I am sure that my noble friend would not want to go outside the law—or can he tell us whether the new directors of the board now could change the situation?

My Lords, that question is legal in content, and I am not able to provide a legal response. However, I can provide some colour and context. Directors of the Royal Bank of Scotland informed Sir Fred Goodwin on the morning of Friday 10 October that he would have to leave the bank. I met the chairman and senior independent director of the Royal Bank of Scotland on Saturday 11 October and was told that that decision had been reached. I specified a number of core conditions. I said that the Government would not expect to see rewards for failure; they would expect to see the cost of executive departures minimised; and they would expect to see mitigation. Those directors went away with that message very clear in their minds.

I was also told by Mr Bob Scott that Sir Fred Goodwin was a man extremely conscious of his contractual rights and was not going to give up any legal or contractual right. Advised as I was that it was a matter of contract, I adopted the same position as my noble friend took in his question: that it is not incumbent on the Government to oblige, require or even suggest to companies that they break a legal undertaking. That was the basis on which I discussed Sir Fred Goodwin’s pension on the evening of Saturday 11 October. To be clear, I did not approve his pension; I was not asked to sign it off; and I was given no papers in connection with it, and quite correctly so. The Government were not a shareholder in the Royal Bank of Scotland at that time. This was a matter for the Royal Bank of Scotland’s board of directors. The decision appears to have been taken by a smaller group of directors, but UKFI is asking further questions about that and no doubt we will learn more in due course. If there is a legal option, no doubt it will consider whether that should be pursued.

My Lords, can I ask the Minister about bonuses, which have come under a lot of criticism of late? Are the people who are going to look after the bank of toxic debts going to have bonuses, too?

My Lords, I suspect that the noble Earl refers to the employees and directors of UK Financial Investments. They are not looking after the toxic debts; they are looking after the Government’s investment in banks. If that is the question the noble Earl has in mind, I will answer it. The non-executive directors of that company have no bonuses at all; the executives—fewer than a dozen—have some modest opportunity for bonuses of marginally more than 10 per cent of their basic salary. I regard that as entirely right and proper as an incentive to performance and a recognition of value delivered.

I see shaking of heads opposite. It would be interesting to know whether the Opposition are now of the view that performance should not be rewarded, incentives should not exist and the Government should get involved in statutory regulation of compensation. For my own part, I do not subscribe to that, and I am fascinated that some on the Conservative Benches seem to be suggesting that they do.