06/12/2011 04:52 GMT

ABI Tells Banks To Curb Bank Bonuses Now

The Association of British Insurers (ABI), an influential investor group representing billions of pounds of assets, has joined demands for pay curbs for bank executives, saying that "it can no longer be business as usual for this remuneration round."

In a letter to all UK listed banks, ABI director general Otto Thoresen called for restraint and transparency in remuneration of senior staff, and said that the association's members - insurance companies - were concerned about the growing disparity between the amount that banks payed their executives and the value they returned to shareholders.

"Members believe that in recent years this balance has been inequitable, with too much value being delivered to employees in contrast to the dividends paid to shareholders," Thoreson said.

"The reduction in employee pay-out ratios needs to be achieved by reducing individual remuneration pay-outs to highly paid employees, including executive directors, and not by just reducing employee numbers."

In November, the High Pay Commission released a report warning that corporate profits have been flowing upwards at a high rate in the last 30 years, and that the resultant discrepancy in rewards between the boardroom and the shop floor is "deeply corrosive" to the British economy.

On Sunday, Deputy Prime Minister Nick Clegg said that the coalition would "call time" on excessive pay, and would be looking to tighten the laws governing pay packets.

The ABI's concerns stem from a belief that rewarding executives despite the poor performance of their companies is bad corporate governance, and undermines company results. While the threat of legislation and public pressure is increasingly being brought to bear on "fat cat" pay packets, shareholders are seen as having more power to directly influence businesses.

Competition for jobs in the City is now less fierce after many companies slashed numbers during the downturn. This, the ABI said, presents a good opportunity for banks to start pay reforms now. The sector has routinely defended its practices, saying that paying large bonuses is the only way to retain talent.

"Our members believe this year is the time to make these changes," Thoresen said. "Very few banks are recruiting and most are reducing employee numbers. Given this lack of competition for staff, our members believe that the retention risk is now reduced."

Thoresen also repeated a call from Bank of England governor Mervyn King that banks should retain money that would normally be paid into bonus pools and use it to build up capital levels - cash held to protect deposits in case of unforeseen events.

The letter took aim at the remuneration committees' use of "discretion" and plead poor market conditions in order to award large bonuses. The European sovereign debt crisis, as well as losses from compensating customers from mis-sold payment protection insurance (PPI) have hit banks' bottom lines.

"These events have had a considerable impact on the banking sector’s profitability. There have also been questions over the portrayal of financial positions and performance given the prevailing accounting standards. Remuneration Committees should not use discretion to increase bonus or other incentive payments because of 'events outside the management’s control'," Thoresen said.

"It is our members’ view that it can no longer be business as usual for this remuneration round. They expect to see significantly lower bonus pools and individual awards given the current market circumstances. It is essential that all banks take, and are seen to take, a responsible approach."