Via The Guardian:
It is tempting from a UK perspective to regard events in Cyprus as a case of domestic violence within the eurozone that doesn’t much affect us.
That would be mistake. The serving of “poison” to Cyprus, as the country’s parliamentary president put it this week, amounts to another statement by Germany that the hard way is the right way. There will be no slackening in the austerity message ahead of September’s election, and thus no meaningful debate on how creditors and debtors are going to live in harmony. Minor accidents like Cyprus, it seems, will simply be allowed to happen and eurozone lenders will try to minimise the bill for themselves.
Progress on banking union, supposedly last year’s big step forward, has been negligible and there’s an unfilled hole at the centre. The European stability mechanism (ESM) was intended to deal with insolvent banks, but then it turned out the fund would not deal in “legacy” issues. That’s not an advance.
Thus every bailout remains an ugly scrap in which, as in Cyprus, heroic assumptions are made about recovery and business confidence across the continent is jolted. Is the next crisis Portugal mark 2, or Slovenia? Only then will companies and large depositors discover whether a Cypriot-style savings-grab is the new template.
Add up the austerity, the mixed messages and the backtracking and it’s no surprise that the IMF expects the euro area GDP to contract 0.2% this year, after contraction of 0.4% last year. For the UK economy euro recession is impossible to ignore. “Engineering a recovery while our main trading partner is in a downturn is a difficult undertaking,” said the Bank of England governor, Sir Mervyn King, in January.
You bet. The economy is not rebalancing in favour of manufacturing. Britain’s trade deficit in goods widened to £9.4bn in February, we learned this week, and factory production is back at levels seen last September. A government desperate for growth – any growth – is reduced to trying to pump up the housing market by underwriting sub-prime mortgages. Stagnation and indecision in euroland are infecting not just the economy but economic policy.
Hope springs eternal that Germany, after the election, will finally decide how far it is prepared to go to save the single currency. Well, maybe. But it’s a reasonable guess that markets, currently understanding of Angela Merkel’s political bind, will demand a quick answer. And a post-election mini-revolt in the eurozone debt markets would be no bad thing: the current muddle-through approach is leading nowhere.
→BP‘s pay structure, according to remuneration chief Antony Burgmans, employs a “relatively simple” system. Relative to what, he doesn’t say, but it’s a challenge for ordinary mortals to keep track of the moving parts. The annual cash bonus scheme alone has 13 “measures and targets”. Then there’s the deferred bonus, and the performance share scheme, not forgetting basic salary and pension.
Thankfully, somebody is paying attention. He is Guy Jubb of Standard Life Investments, who told the board at this week’s shareholder meeting to “raise its game”. He’s right about the complexity, and he’s also right when he says the executives have the potential to receive “significant rewards for achieving unchallenging performance targets”.
The giveaway is the table that illustrates what chief executive Bob Dudley should receive in a year in which he achieves merely an “on target” performance – a cool $10m (£6.5m), even if the share price went sideways.
How is that possible for a middling performance? It’s because long-term incentive plans (LTIPs) have become vastly inflated over the years. Once upon a time, 100% of salary for an LTIP was seen as the largest carrot that could be offered to an executive. These days Dudley can earn 550% of salary under his LTIP. In cash terms, today’s “on target” performance equates to yesterday’s hit-the-ball-out-of-the-park performance.
Jubb calculates that by merely coming third out of five in a league table of oil companies ranked by total shareholder return (TSR), BP’s chief executive can receive shares equivalent to nearly two-thirds of his $1.7m salary. Third out of five? If BP really believes that’s worthy of a £1m bonus it should drop the pretence that Dudley’s package is driven by tough performance targets.
The company was very pleased that 94% of voting shareholders backed the pay report. The reason for that, one suspects, is that executive payouts from incentive schemes have been depressed by the Deepwater Horizon disaster in 2010. Now that the effect of the disaster on the share price will drop out of the three-yearly TSR calculations, Dudley’s generous rewards for “on target” results are much more likely to materialise.
Complexity and the redefinition of success are how boardroom pay outstripped shareholders’ gains in the past. It’s happening again. BP is probably not unique.
→HBOS famously ignored a cardinal rule of banking: never take an equity stake in a company to which you are a lender. If you do, you are no longer a bank but a private equity house and there’s trouble in store in the event of a restructuring.
Some of HBOS’s early loan-plus-equity adventures turned out spectacularly well, such as Sir Philip Green’s takeover of Arcadia, the Top Shop group, in 2002. But that doesn’t deflect from the wisdom of the basic risk-management principle that lenders should not dabble in the shares of a customer.
Less remembered is how far HBOS was prepared to go. Ray Perman’s lively book – Hubris: how HBOS wrecked the best bank in Britain – recalls the detail of Green’s attempt (eventually abandoned) to buy Marks & Spencer in 2004. In that case, HBOS would have been a major lender in the £9.5bn offer. But the bank’s chairman, Lord Stevenson, was also lined up to be a non-executive director of Green’s bid vehicle. It is hard to think of a more glaring example of a conflict of interest.
Perman reports that arrangement caused one of the few rows within the HBOS board. It also caused a fuss in the outside world at the time, but should have caused more. It was an early clue that HBOS directors had deluded themselves that traditional rules of banking didn’t apply to them.