Lloyds: £2m in bonuses taken back

  • 20 February 2012
  • From the section Business
  • comments
Eric Daniels leaves Downing St in 2008
Eric Daniels will have to give up £700,000 of his bonus

One of the important reforms insisted on by regulators after the 2008 banking crisis was that bankers should have to give back some of their bonuses, if their bank performed worse than expected.

This is happening for the first time at a British bank - at Lloyds - because of the huge mess it made of mis-selling PPI credit insurance to customers.

It is quite an important moment, therefore, as the first time that British bankers have had to pay back some of what they thought they had already earned.

About 10 executives will see up to £2m of bonuses awarded to them taken back.

The former chief executive Eric Daniels is being forced to surrender up to £700,000 of a £1.45m bonus. And other directors and executives are giving up between £100,000 and a quarter of a million pounds each.

This will still leave them with substantial rewards. And some will say it is small comfort to the Lloyds customers caused considerable distress when they found their PPI insurance was worthless.

Also, £2m is not a huge sum next to the £3.2bn costs for Lloyds of compensating customers for the mis-selling - which has tipped Lloyds back into huge losses for 2011 (it will confirm the magnitude of those losses when its results are published on Friday).

That said, for the owners of the business, including taxpayers with a 41% stake, the clawback of bonuses is important for its deterrent effect.

Although some may see the clawback as an instance of stable doors and horses, if bankers start to feel that there is a serious risk of impoverishment when decisions they take go bad - even when those decisions go bad several years down the track - it may make them kick the tyres a little bit more assiduously when they launch new products or do assorted deals.

UPDATE

It turns out that this reduction of bonuses for Lloyds executives is a little bit more complicated than I thought.

Basically there has been a retrospective reduction in the size of the 2010 bonus pool, to reflect the fact that 2010 profits should have been much lower, to reflect the initial court case on mis-selling that went against the banks (and the subsequent decision to incur a £3.2bn charge to cover compensation costs).

However this does not mean that bonuses for all Lloyds staff are being cut. The reduction in bonuses relates only to executives in some way involved in PPI mis-selling.

And as I said earlier, this will mean a reduction in bonus of up to £700,000 for the former chief executive, Eric Daniels, a reduction of around £250,000 for three other board-level directors, and cuts of around £100,000 for five or so executives below board level.

But to be clear, this is not - in a technical sense - a clawback. It is an ex post reduction in the bonus awarded (stay awake).

Also, the Financial Services Authority has decided that the bonus-reduction does not represent an admission or verdict of guilt in respect of PPI mis-selling by the affected bankers - so they will not be automatically disqualified from working in banking.

UPDATE 16:05 GMT

It is fascinating that Lloyds' official statement relating to the reduction in bonus payments talks about the 13 relevant and poorer executives being "accountable" for the PPI misselling debacle, but not "culpable".

In respect of reducing their 2010 bonuses, it seems to have been easier for Lloyds simply to point to the fact that these bankers were on the Group Executive Committee at the relevant time, rather than trying to assign personal responsibility for the mis-selling through a painful, legalistic evidential process.

So I am not sure how much of a precedent all this represents, in respect of the ability of other banks to retrieve bonuses that have been awarded but not yet handed over to bankers, in the event that the performance of said banks was to turn out to be worse than expected.

In the case of RBS, which mis-sold PPI insurance to a lesser but still substantial extent, it says that it can't get back bonuses from its executives - because it stopped selling its main PPI product at the end of 2008, there were no bonuses awarded for 2008, and all the relevant executives have left the bank.

RBS tells me that the FSA, the regulator, has agreed its position on all this.

That said, the total bonus pools in respect of 2011 performance for both Lloyds and RBS have been cut, to take account of the banks' substantial losses from paying PPI compensation - which means the bonuses of most current executives will be reduced a bit.

PS Here are the final definitive numbers on bonus cuts for Lloyds executives.

Eric Daniels is collecting £580,000 less than he was awarded.

Four other directors will receive between £190,000 and £260,000 less than they were awarded.

And a further eight executives have seen their bonuses shrunk by around £50,000 or less.