30th January 2012
What would Sir Stelios do?
EasyJet founder and major shareholder Sir Stelios Haji-Ioannou certainly thinks the answer to the question above is a firm no – at least as far as the airline goes. So frequently at odds with the airline's board – led by former Guardian Media Group boss Carolyn McCall – that odd moments of peace are noteworthy, the holder of a 37.5% stake in the firm has now declared war on EasyJet executive bonuses.
Are they irreplaceable?
The pay issue has now become pivotal for investors. With the Barclays bonus flashpoint fast looming, they must now decide whether executives have unique – or at least very rare – talents that they are irreplaceable, or whether they have adopted the closed shop mentality of 1960s and 1970s trade unions. Until the Thatcher government of the 1980s, unions used pay agreements already achieved to ratchet up their demands on the grounds of comparability. They relied on the closed shop deal to keep out those who might be willing to work for less.
The essential investor arithmetic is to compare how much they are paid in dividends compared to bonuses paid to the boardroom and senior executive floor.
Do dividends match the bonus payouts?
With Hester and RBS, there is no possible comparison as RBS last paid a dividend in May 2008. Five years ago, RBS shares were worth around 700p each – now they trade at 27p, down from 46p over the past year.
Based on last year's dividends, to equal each £1m earned in a Barclays bonus, a shareholder would need to hold 18.2m shares valued currently at £40m.
Mail Online suggests Barclays chief executive Bob Diamond is on course for a £10m bonus – equal to a near £400m shareholding. Diamond is the only significant Barclays shareholder on the board – he has 13.2m shares worth £29m. But to generate a dividend equal to the £10m bonus, he would need to hold 182m shares or a 1.5% stake in the bank, a level that few institutional shareholders achieve. Barclays announces results on February 10.
Shareholders are increasingly comparing their reward for taking the ownership risks – the dividend – with the amounts paid out in bonuses not just to the boardroom, but also to others on the payroll. In February 2011, Barclays announced a total £3.4bn bonus pool. While a substantial slice went outside the boardroom, the payment was on top of salaries. By comparison, Barclays paid shareholders, who risk their capital, dividends totalling some £680m – or around one fifth of the bonus pool.
Barclays is under pressure from shareholders over the bonus issue – this article is one of many to make the point. Discussing the morality of these payments, blogger Louise Alexandra McCudden suggests that: "After a certain point these kinds of bonuses aren't really incentivising at all. I see it almost as a kind of inverse of the Laffer Curve – if you give too great a reward, too disproportionate to actual achievement or skill, it becomes completely counter productive." If she is right, then investors are right to attempt to downgrade bonus payments.
And as the EasyJet row makes clear, the bonus vs shareholder issue is not confined to to banking. According to BBC News, Stelios wants to slash extra payments to directors and other senior employees, in this case because he does not like the strategy and recent plane orders.
The board has threatened to resign en masse – effectively threatening a strike. But Stelios does not care, expecting he can either face them down or find new directors.
He told the BBC that he was unfazed by the threat. Attacking the "gravy train" of major companies, Sir Stelios said: "These guys are welcome to resign anytime.
"I know as shareholders we could easily replace them with talented executives and experienced non-executive directors who will cost half as much in bonuses," he said in a statement.
"We must take a stand against directors who seem to regard our company as their personal piggy bank to be dipped into at will. Simply put if shareholders can vote down bonuses at Easyjet then bonuses will come down in all listed companies. And that is good for shareholders and pensioners whose pensions are invested in these companies," he added.
…a rogue trader
Back in September, Mindful Money reported on the case of a UBS "rogue trader" who allegedly lost the back in excess of $2bn. Earlier today, former UBS employee Kweku Adoboli pleaded not guilty to charges of fraud and false accounting at a London court.
According to a report in The Financial Times two months ago, the loss could result in a reduced bonus pool at UBS. It will also bring into question whether bonuses earned in the department which suffered the losses should be repaid. The Wall Street Journal today reports that regulators both in the UK and in Switzerland may take steps against bank UBS (UBSN.VX)
for "shortfalls in oversight that allowed an alleged rogue trader to run up a huge loss".
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