Finance minister seeks to cap pay of top bankers

Financial institutions whose deposits have been fully guaranteed by the Irish government have been asked to limit the pay of top-level executives to €500,000 a year. The call was made by Ireland’s Minister for Finance, thereby overruling a proposal by a government body set up to examine pay at the top level of the country’s main banks. The latter body issued a report in March 2009 recommending pay thresholds for top-level executives in Ireland’s banks.

In a report (174Kb PDF) issued in March 2009, a special government-appointed three-person body – known as the Covered Institutions Remuneration Oversight Committee (CIROC) – concluded that the chief executive officers (CEOs) at the country’s two main banks, Allied Irish Bank (AIB) and Bank of Ireland, should be paid a maximum of €690,000 a year. In addition, CIROC recommended that the pay of CEOs at the recently nationalised Anglo Irish Bank, along with the pay of those at Irish Life & Permanent, should be capped at €545,000.

However, Ireland’s Minister for Finance, Brian Lenihan, has since written to these banks – all of which are guaranteed institutions (IE0810049I) – asking them to consider a maximum pay cap of €500,000 for the top banks and a tiered pay structure for lower-ranking executives. Overall, while the government stated that it considered CIROC’s recommendations on bonuses, pensions, long-term incentive plans and board subcommittees to be ‘appropriate’, it contended that ‘remuneration terms should be lower than those recommended’.

Main CIROC proposals

In its report to the minister, CIROC highlighted that a ‘radically different approach’ to remuneration for executives in financial institutions covered by the state guarantee will be required in the years ahead.

Remuneration

Among CIROC’s key proposals are the following:

• the payment of a base salary for CEOs and executive directors that is 25% below the industry average in the case of the two banks that have been recapitalised – namely, AIB and Bank of Ireland;

• the payment of a base salary that is 12.5% below the average in the case of the other institutions covered by the Irish government bank guarantee;

• introducing a cap ‘in the region of’ €690,000 on the annual base salary for AIB and Bank of Ireland’s CEOs;

• introducing a pay cap of €545,000 for the bosses of Anglo Irish Bank and Irish Life & Permanent;

• maintaining the annual salaries at €360,000 for CEOs at the EBS Building Society (EBS) and the Irish Nationwide Building Society;

• introducing a cap of €230,000 on the annual base salary of the CEO of Postbank;

• adjusting the pay of other executives to take account of the revised salaries of CEOs;

• scrapping performance bonuses for CEOs and executive directors for the period of the state bank guarantee;

• introducing new bonus arrangements only when the institution in question is no longer part of the government guarantee scheme;

• introducing a new set of basic principles in the design of bonus schemes – in particular, ‘future bonus schemes must be structured in a manner that discourages unacceptable risk-taking. A focus on short-term targets should be avoided’.

Bonus payments

Limits on bonus payments are also proposed by CIROC, including:

• a freeze on bonuses if a group profit has not been achieved;

• a cap on bonuses of 80% of basic salary – moreover, the maximum bonus should not be paid for simply meeting targets.

The report also recommended that:

A superior performance where demanding targets have been exceeded should be required for maximum payment … Bonuses should be based on multi-annual objectives and should contain a major element of deferral of payment where the achievement of objectives can be assessed properly. A period of three to five years might be appropriate in this regard.

Pension arrangements

In addition, a review of the pension arrangements for top management was proposed:

Pension arrangements should reflect public policy and tax law, and it is unacceptable that arrangements should be put in place which would be inconsistent with the intent of the relevant legislation.

High payouts to top managers criticised

In its report, CIROC is strongly critical of the high level of payouts to top managers at Irish financial institutions that became the norm over the past decade.

Up to the year 2000, Irish financial institutions adopted a conservative policy in relation to remuneration. However, that policy began to change and had developed dramatically by the 2003–2004 period. Information provided to us suggested that annual bonuses had doubled approximately in the last 10 years, influenced by a similar growth in the UK. However, in the UK there was a strong element of deferral of bonuses, but this did not become general practice in Ireland.

In a related development, the Irish Times newspaper reported that one of the board members of the Irish Nationwide Building Society, Danny Kitchen, had agreed to replace Michael Fingleton as CEO of the organisation, but that he later declined the post after the government had capped the salary at the aforementioned €360,000 a year figure proposed by CIROC.

Brian Sheehan, IRN Publishing