By Steve Slater
LONDON (Reuters) - Years of "unacceptable" pay by banks to their staff have made it hard to defend the industry against rules such as the European Union's proposed cap on bonuses, a leading British business leader said.
"Just look at the EU's bonus cap. Wrong-headed and counter-productive as it is, the behaviour of some of our banks makes it difficult for anyone to stand at their side to credibly fight against it," said Simon Walker, director general of Britain's Institute of Directors.
Walker criticised Barclays and Royal Bank of Scotland, which paid more than 500 staff over 1 million pounds each last year.
"Thousands of people in those two companies alone earn more even than the Prime Minister. This is in scandal-hit companies who have had a far from successful year," Walker said in a speech on Tuesday that was released on Wednesday.
"Even I believe that this state of affairs is unacceptable. Shareholder value has been destroyed ... taxpayers have shelled out billions to bail banks out, and yet vast rewards packages are still being handed out."
His comments show the problem faced by banks fighting the EU's proposal to limit banker bonuses to equal their base salary, or two times salary with approval from investors, in what is seen as the toughest clampdown on bonuses anywhere in the world.
Britain alone opposed the plan, and politicians, regulators, investors and bankers have warned it will have unintended consequences. It will lead to higher fixed salaries with less flexibility, could reduce scrutiny on performance, provide less scope to claw back pay, and risks seeing top staff move to banks in Asia and the United States, they say.
HIGHER FIXED PAY
The aim of the bonus cap is to cut bonuses, but banks are expected to compensate by lifting base salaries.
In Britain, Barclays is likely to be most affected. It could have to increase fixed pay for top staff by 75 percent - and reduce bonuses by the same amount - to preserve overall pay, according to Reuters estimates.
The estimate is based on its latest pay disclosures for its 393 "code staff" - people in significant risk-facing positions - and how much the bank should have to shift to fixed pay from the bonus pot to keep overall pay the same and stay under a bonus cap of twice base salary.
Asia-focused Standard Chartered and HSBC could have to increase fixed pay by 43 percent and 22 percent, respectively, on the same basis.
Part-nationalised RBS and Lloyds would not have to make many adjustments, although they are less likely to get shareholder approval to allow bonuses of twice salary.
The cost for the five banks would come in at around 112 million pounds, including 75 million at Barclays, far less than industry estimates, and a tenth of how much the banks paid in a UK bank levy last year.
Estimates of the potential cost to the industry vary widely, however.
Andrew Bailey, the UK's top banking supervisor, said on Wednesday that fixed costs for UK banks' top staff could rise by 500 million pounds to keep pay levels the same and meet the EU bonus cap proposals.
"I am very concerned about it," Bailey said of the bonus cap proposal. He said it could undermine improvements in the last three years to defer pay, award more in shares, and claw back some awards, estimating pay was cut by 2.5 billion pounds last year by clawbacks and a reduction in bonuses due to bad conduct.
The EU proposals, set to come in next year, have not been finalised but look set to be applied to senior management and so-called "risk takers", such as traders, potentially covering between 300 and 500 people at each large bank.
The rules are likely to force significant change in how pay for chief executives is structured. Banks have adjusted executive pay structures in recent year and most offer far more in bonuses than fixed pay, which they say investors prefer.
HSBC CEO Stuart Gulliver, for example, is on a basic salary of 1.25 million pounds, but has the potential to get nine times that in bonus and long-term awards.
Barclays CEO Antony Jenkins and RBS CEO Stephen Hester can both get 6.5 times their salary in bonus and long-term awards.
Banks said it is too early to assess the impact of the bonus cap on their pay, but sources said some are assessing whether executive pay structures need to be amended before shareholder meetings in the coming months.
(Editing by Tom Pfeiffer)