UK bank shareholders want end to bonuses based on adjusted earnings

Big shareholders in UK banks want lenders to stop paying bonuses based on adjusted earnings that exclude fines, restructuring costs and non-core units, raising the prospect of protest votes at annual meetings starting this week.

"I'm really uncomfortable about banks paying themselves bonuses on the basis of core earnings, not statutory profit," said a top-20 investor in Barclays and HSBC, which both have AGMs this week. "That is something we are exercised about and we have told them so."

Using adjusted or underlying profits to calculate bonuses means banking executives can pay themselves handsomely even if there is a drop in statutory earnings.

Several of the biggest shareholders in British banks told the Financial Times they were sufficiently concerned about the issue to raise it with executives and consider voting against the banks' remuneration reports.

Although some companies outside the financial sector also use adjusted earnings to calculate bonuses, investors are more concerned about banks because many have large non-core units and hefty legal and restructuring costs.

A top-20 investor in HSBC and Standard Chartered, said: "It is typical of executive pay schemes that the banks and some companies exclude the bad stuff."

Antony Jenkins, Barclays chief executive, received a bonus of £1.1m - his first since he took the top job in 2012 - partly based on adjusted profits rising 12 per cent to £5.5bn last year. But including non-core operations and the cost of legal provisions and restructuring, the bank made an attributable net loss for shareholders of £174m.

Barclays, however, said in its annual report it had taken account of litigation costs in reducing Mr Jenkins's bonus from the maximum he could have earned. A person close to the bank pointed out that dividends were also calculated on the basis of adjusted earnings.

Pirc, an investor advisory agency, has recommended shareholders to vote against the Barclays remuneration report, although other agencies were in favour, such as ISS and Glass Lewis.

A top-20 investor in Barclays, Lloyds Banking Group and HSBC, said: "We are unhappy at the way the remcos [remuneration committees] favour the employees in the way they hand out bonuses by aligning all the good things to the bonus and stripping out all the bad things.

"The banks are bad when it comes to this. It is a vexing issue. It is like comparing chalk and cheese. This is an issue that could spark some rebellions at AGMs over remuneration."

Royal Bank of Scotland partly based its bonuses on economic profit, a form of post-tax operating profit that strips out non-core operations. RBS made an attributable loss of £3.7bn last year, but excluding discontinued operations it made a pre-tax operating profit of £2.6bn.

Lloyds used "financial underlying profit" for a big part of its bonus calculation. Yet it made a 25 per cent deduction to reflect "legacy conduct-related matters" such as a fine for Libor interest rate manipulation. The bank made underlying profit of £7.8bn last year, but its net profit attributable to shareholders was only £1.1bn.

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A top-20 investor in Barclays and HSBC said: "We realise that it is not always easy to calculate these things, but it does seem that executives end up with packages and bonuses that are generous to them."

The five UK banks declined to comment. One banking executive said statutory profit was not an ideal benchmark for bonus calculations because it could in the future be boosted by one-off pension and insurance gains.

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