Barclays has made things difficult for itself. Next month, the UK bank will reveal the size of Chief Executive Bob Diamond’s annual bonus. One powerful way to show he deserved it would have been to produce a stellar performance for 2011. Unfortunately for Diamond, he will have to find another justification.
Barclays had a mixed year. On the plus side, pre-tax profit rose 60 percent in UK retail, where returns exceeded the cost of equity. Diamond has also strengthened Barclays’ balance sheet: its core Tier 1 capital ratio rose to 11 percent, and tangible assets have increased too. And Barclays exceeded government targets for lending to small UK businesses.
But overall pre-tax profit was down. Barclays’ European retail operation made a loss and – unlike in previous years – its Barclays Capital investment banking arm could not come to the rescue. BarCap’s all-important fixed income, currencies and commodities unit reported a 32 percent drop in income between the third and fourth quarters of 2011 – worse than a number of peers. With an ROE of 10.4 percent, the division is no longer covering its cost of capital either.
The result is that Diamond has had to rethink his targets. Achieving an ROE of 13 percent by 2013 always looked ambitious: most rivals have already scrapped their similarly optimistic goals. Barclays is sticking with the threshold, but says it will hit it “over time”. Given that last year’s ROE was a measly 6.6 percent, it could be later rather than sooner.
This creates a problem. Diamond’s “annual performance incentive”, to be divulged at March’s AGM, is not purely based on financial criteria. But the bank’s performance in 2011, and the 31 percent drop in its share price, scarcely warrant huge rewards.
Barclays has attempted to pre-empt the bonus row by slashing the staff bonus pool by a quarter. Payouts for top executives, meanwhile, are down 48 percent compared to 2010. But even if Diamond received half his full 3.4 million pound entitlement, that would still comfortably exceed the sub-1 million pound bonus awarded to Royal Bank of Scotland chief Stephen Hester – which he was subsequently forced to turn down. From the perspective of the British public – and a fair number of Barclays shareholders – any payout may ultimately look too high.
