Paul Hodgson: Is Barclays going to put its money where its mouth is on performance incentives?

As Barclays CEO, Antony Jenkins testifies to a UK Parliament Committee today (Feb 5) over ethical issues, Paul Hodgson argues that clawbacks have to mean something.

It’s been reported that the new CEO of Barclays, Antony Jenkins, has written to the bank’s 139,000 staff indicating that Barclays had to become “a values-driven business” if it wanted to be “a valuable business”. Mr. Jenkins outlined five core values for the bank: respect, integrity, service, excellence and stewardship. Like other banks, Barclays was involved in manipulating LIBOR and in the mis-selling of payment protection insurance and interest rate swaps. The bank has set aside approximately £2.6bn (€2.9bn) in potential compensation for the latter two issues and has already been fined $450m in relation to the LIBOR scandal. My interest in the letter was sparked by this section: “Performance assessment will be based not just on what we deliver but on how we deliver it. We must never again be in a position of rewarding people for making the bank money in a way which is unethical or inconsistent with our values.” The letter follows one in September last year in which Jenkins also said performance would be measured against values as well as financial performance. Indeed, Barclays’ remuneration committee report had also already claimed that the bank was doing this. Moreover, these principles were in place all the way through the LIBOR, mis-selling and interest rate swap scandals. I know this because back in October I wrote an op-ed article for Bloomberg that investigated the lack of remuneration clawbacks at the major banks where unethical practices had been common. The passage from Barclays’ 2011 remuneration committee report reads: “Events that may lead to the operation of clawback provisions include employee misconduct, harm to Barclays’ reputation, material restatement of Barclays’ financial statements, a material failure of risk management or a significant deterioration in the financial health of Barclays. Clawback provisions may also result in suspension of deferred bonuses where an employee is under investigation for a regulatory or disciplinary matter.”Surely such behaviours as were evident at the bank would have led to clawbacks. And surely the threat of clawbacks for these behaviours would have gone some way to discourage them? They do not appear to have done so. Saying you are going to do something and actually doing it are two very different things. It might seem churlish to single out Barclays for criticism since I know that virtually all the other major banking institutions involved in other unethical and illegal activity over the past five years, have similar codes or principles of best practice and claim to link them to remuneration. But the letter to its employees singled Barclays out. If the CEO has decided that he expects his staff to meet expectations that are not necessarily in place at other banks, then this warrants investigation, as well as constructive criticism. The passage quoted above is not the only time Barclays has referred in the past to non-financial or values-based performance targets. One of the five aims of the banks’ Remuneration Policy is to: “Encourage behaviour consistent with Barclays’ guiding principles.” Yes, it is the fifth principle but at least it made it to the top five!
In addition to formal performance reviews against pre-set performance targets and financial metrics, employees are also assessed against compliance and risk audits in order to ensure that the bonus pool properly reflects this performance. Furthermore, the individual reviews also assess “individual behaviour against Barclays’ guiding principles and applicable risk and control policies.” There it is again. The inherent threat is clearly laid out in the committee report:
“The vesting of deferred bonuses is dependent on future service and subject to clawback provisions. The Committee reviews the operation of clawback provisions and may reduce the vesting level of an unvested deferred bonus (including to nil).”
With all of this in place, it is tempting to ask

what difference to the behaviour of Barclays’ employees Mr Jenkins’ letter could make, since it is apparently reiterating what was already bank policy at the time of the scandals? One change that might improve behaviour would be to move the fifth aim of remuneration policy to the number one position and to change the word “encourage” to “enforce”; and then, actually, enforce it. Another change might be to make compliance with the bank’s guiding principles not simply an aim of its remuneration policy but a gateway to receiving incentive remuneration at all, regardless of performance against financial targets. Or, even more draconian yet in line withMr Jenkins’ words, compliance is a condition of continued employment. The few corporations I have talked to which are serious about enforcing ethical behaviour are regularly impelled by their own guidelines to sack employees who violate ethics policies, never mind claw back their incentive remuneration. So, Mr, Jenkins, please accept this constructive criticism. It is encouraging that you recognise this issue is of paramount importance. In offering these suggestions I am certainly not discouraging this initiative but recognising its value. What is most important, however, is not what you say but what you do.

Paul Hodgson is an independent governance analyst