The sale of taxpayers’ last shares in AIB last summer meant the Government scrapped the final bailout-era basic pay caps across Irish banks. Ending the effective ban on large bonuses, however, remains politically taboo.
It’s seen remuneration committees turn increasingly to a workaround that swept through Europe – led by the City of London – a dozen years ago as banks sought to navigate bonus limits brought in by the European Union in the wake of the financial crisis: the fixed share allowance (FSA).
Brussels introduced rules at the start of 2014 in response to excessive risk-taking that contributed to the 2008 crash, limiting banker bonuses to 100 per cent of fixed pay, or 200 per cent if they are backed by a majority of shareholders.
A survey of compliance by the European Banking Authority over the next nine months found that 39 banks had used “role-based” or “market value” allowances, which the lenders classified as fixed remuneration, on which bonuses were calculated.
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On inspection, the authority found that in most cases the allowances were not really fixed, but discretionary, with banks allowed to adjust or withdraw them unilaterally, without any justification, it said in a report at the time.
A subsequent clampdown prompted the rise of the no-strings-attached fixed pay allowance, which, in practice, is most commonly paid out by way of company shares.
AIB revealed in its annual report this week that it has increased chief executive Colin Hunt’s €600,000 basic salary – which kept him toward the bottom of pay league of Irish plcs since he took on the role in 2019 – to €1.35 million. His chief financial officer Donal Galvin’s salary has risen by two-thirds to €810,000.
With bonuses above €20,000 essentially prohibited by Irish law – thanks to a supertax of 89 per cent that slipped into the Finance Act 2011 to apply to any variable pay above that amount – AIB said it now plans “to bring executive directors’ remuneration closer to market levels” by giving them a top up of as much as 100 per cent a year by way of shares in the company.
It would mean Hunt’s remuneration jumps to €2.7 million, 5.4 times his pay level for 2024 – before pension and other benefits like a car allowance and health insurance.
Further details of the plan will be outlined in shareholder documents in the lead-up to the bank’s annual general meeting (agm) next month.
AIB is not the first in Ireland to go down this road. Months after the last government sold its final shares in Bank of Ireland in late 2022 and ended its pay cap, the group said it would start topping up the pay of chief executive Myles O’Grady and other top executives with share awards that “are not subject to any performance conditions” – leaving them outside the scope of the bonus blocker.
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The FSA has increased from 50 per cent of salary to 100 per cent since then. It will bring O’Grady’s fixed pay package to almost €2 million in 2026, the first full year in which the share awards have maxed out.
Leading international proxy advisory firms like Investor Shareholder Services and Glass Lewis, who advise big shareholders on listed companies’ agm resolutions, have been sanguine about the awards in recent years, given the political backdrop.
They’ve taken comfort from the fact that Bank of Ireland executives in receipt of the PSA must build up and maintain shares to the value of 200 per cent of salary – and maintain this for at least two years after leaving. This somewhat aligns their interests with those of other shareholders over the medium term. AIB is planning similar terms.
But it’s been far from ideal. When you consider the scale of the PSAs in play now – with no chance for a remuneration committee to act in the interests of shareholders to scale remuneration back when a business or an executive is underperforming – the framework for senior bankers’ pay is verging on farcical.
AIB said in its annual report that its new total target pay for top executives is below market norms, having considered comparably sized UK and Irish listed businesses as well as European banking peers. And that it is “significantly below” the maximum pay among the peer group that has bonus plans.
But it is guaranteed and may stand out from the pack in bad times.
A central part of the EU’s banker pay reforms more than a decade ago was also to give boards the ability to reduce or cancel bonuses that have not been paid, or claw back performance-related pay if certain problems are discovered later. Here, too, the hands of board members of Irish banks are tied.
There was a good argument for bonuses to be banned while taxpayers remained shareholders in these companies and tracker-mortgage investigations were ongoing. But not any more.
Properly structured variable pay is an important tool of good governance. In Irish banking, specifically, it would be the carrot to the stick of one of Europe’s toughest senior executive accountability regimes – introduced over the past two years – that makes it far easier to hold top finance executives responsible for failures under their watch.
Keeping the current system is even more absurd now that PTSB is on the block. It will handcuff future owners on pay decisions and may even play into the price that the Government actually achieves for its 57 per cent stake.
