Sunday Thoughts: pay, contracts and the banks

Sunday, February 15th, 2009 - redundancy, sunday thoughts, tutorial, unemployment

Redundancy Pay

Lessons post the 2008 banking crisis

There has been much coverage of the pay packets that the directors, former directors, ex-traders and bankers of the “saved” banks have both had in the past, are now due, and will be paid in the future.

We “suddenly” find that some people who were on basics of £100,000+ were often paid bonuses that at least doubled that, if not extended it to five times basic. Mean while their directors had basics of £2million, total pay up to £5million, and had accrued pension pots of £8million – Sir Fred, you did well (for yourself…..)

These bonuses made sense in the good times, while they were making profits. The problem is, we now know those were balloon returns made on US Sub-prime investments.

So, its OK politically now to suggest that these well heeled bankers should not be paid – let alone a bonus – but that’s not possible in most cases. Mistakes have been made in many quarters, but thanks to employment and contract law, only some of those in the past can be rectified. The future is a whole different ball game.

Technically, at least two of the main UK banks were bankrupt last September – RBoS run by Sir Fred Goodwin, and HBoS run by Andy Hornby. The press has filed these two business men in the same pot, but a look at the facts shows the difference. Goodwin had taken over 28 financial institutions in his building of RBoS, while Hornby had taken HBoS net leanding in the UK mortgage market from 28% to 8% in his 25months in post. Goodwin’s RBoS was sunk by his own egotistical building of a global bank, and specifically the ABN Amro deal; Hornby’s HBoS sunk because he couldn’t reverse the strategy of Sir James Crosby, and got caught out by the autumnal cessastion of the wholesales banking market. I think Sir Fred has shot his bolt, while Hornby should return to retail after dusting himself down – his credability is intact.

As the banks were technically bankrupt, the UK Treasury and Alistair Darling had two choices – let them fail, or support them. Gordon Brown and Darling argue it was the right thing to do, and I don’t think many would argue against that – we would have had complete meltdown in world finance.

But tactically, when they took the next step they could have insisted on more. The share investments in both organisations – RBoS and the new Lloyds Banking Group – could have come with some strings on pay. But they didn’t, and now the government are left with some political egg on their face.

If the banks had gone into bankruptcy, then employee’s would have been paid redundancy pay, calculated as:

  • 0.5 week’s pay for each full year of service where age during year less than 22
  • 1.0 week’s pay for each full year of service where age during year is 22 or above, but less than 41
  • 1.5 weeks’ pay for each full year of service where age during year is 41+

Oh, and PS, there’s one other thing: maximum weekly pay under redundancy pay terms is £350/week, or £18,200 per annum – bit less than £100,000!

Why didn’t the UK Treasury point this out to the banks board BEFORE making their investments? Like much of the Brown administration, good ideals are often being under mined by poor thorough thinking at all levels, requiring later back pedalling when egg-on-face is applied by the media.

Goodwin recognised the new climate, and gave-up his redundancy payment under his contract. The questions to him this week from the Commons Select Committee on Finance on his pension pot – much as though it was over paid previously – thanks to the exploits of “Capt.Bob” are ring fenced once invested.

As any sales person knows, there is a little clause in their contracts which mentions claw-back. Claw-back means much as though you may presently due a bonus calculated as X under the scheme, the company reserve the right to reclaim – ie: claw-back – that bonus should the customer claim a refund or not complete their agreed contract. The problem seems to be in the banks that there was no claw-back clause. And much as though Sir Fred’s pension is ring-fenced, pensions are a neat solution to paying executives extra money in a legitimate tax-free way.

So where now? Stephen Hestor has already announced in public and at Westminster this week that he will do as much as he can to curb forward payments and look at past payments. But when he’s on a Downing Street approved exit clause with a parachute payment should he fail of £4million, again one wonders whether those who approved such a contract had their heads in gera at the time. Menawhile, Eric Daniels of Lloyds banking group has other problems to address over pay – finishing the Hornby job of terminating Crosby’s strategy.

There was one point though that Hestor in his evidence to the Select Committee showed that he is the right man to bring RBoS around. Hestor pointed out that of the proposed bonus pot to be paid, out of 177,000 employess at RBoS, only bonuses for around 1,000 employees were in question when paid against losses incurred.

So let’s get the problem in scale. Contracts are contracts, and employment law is employment law. What much of the current media commentary seems to ignore and steam roller through is that those contracts exist and are more enforceable and defensible than a red-top headline.

The contracts may not have been right when agreed, and may well pay too much and in the wrong way – but they are enforceable. If we forget that, then we get back to the likes of Capt Bob – and that is far, far worse than paying a few over paid bankers to stay in the mess they created, in the hope they can revive the country.

Good Luck!

If you need an interview winning solution, sign-up for our Professional CV service

Be Sociable, Share!

One Response to “Sunday Thoughts: pay, contracts and the banks”

  1. Redundancy Pay | CV4.BIZ | Says:

    […] Redundancy Pay | CV4.BIZ […]

Recent Posts



Review on