Executives need long-term incentives, says ex-AIB chief
‘The executives of any bank should be at risk as any shareholder’ – David Duffy
Former AIB chief executive David Duffy said: “If you’re doing an IPO and expecting investors to put up money for a €15 billion or €20 billion [value] IPO . . . they like management to be as exposed to the performance of the bank as they are.”
Former AIB chief executive David Duffy believes potential investors in a flotation of the bank’s shares would want its executives locked in to a long-term incentive arrangement before investing in the State-owned institution.
In a wide-ranging interview with Business This Week, Mr Duffy said investors would want executives to have “skin in the game” before investing in the expected initial public offering (IPO) of 25 per cent of AIB.
“If you’re doing an IPO and expecting investors to put up money for a €15 billion or €20 billion [value] IPO . . . they like management to be as exposed to the performance of the bank as they are.
“That would probably necessitate some discussion that would change the status quo [on remuneration]. When I was doing this [Clydesdale] IPO . . . there was a very significant series of questions around ‘how do I know you are committed?’, ‘are you at risk?’,” he said.
“The executives of any bank should be at risk as any shareholder, 100 per cent. If you’re going to do one of the biggest IPOs in Europe, I think the investors will put a lot of pressure on to have that issue resolved.”
Executives at domestic banks are subject to a €500,000 Government salary cap, with no bonuses.
Mr Duffy received €485,000 as AIB chief executive in 2014, his last full year with the bank. By contrast, he was paid a £500,000 (€619,000) signing-on fee by Clydesdale and receives an annual salary of £1 million, plus £245,000 in pension and allowances, and has a long-term incentive package worth £1.5 million.
While he understood the focus on his pay during his time with AIB, Mr Duffy grew weary of being “crapped on” even when he took cuts in salary and pension payments.
Would he have expected an increase in remuneration had he stayed with AIB to manage its IPO?
“Probably not a pay increase,” he said. “I would have expected some sort of participation in the upside to the bank in the future which puts you at risk. Heavily deferred. Something like that.”
In the UK, chief executives can earn up to two times their base salary in cash and share options. “Typically deferred [by] three to five years . . . [with a] claw back for up to 10 years,” he explained. “ That’s fair compensation. A lot of what went wrong in banking was around incentivising people in terms of volume.”
Mr Duffy left AIB in May 2015, taking just two days off before joining Clydesdale and steering it through a de-merger from National Australia Bank, and an IPO in February.
He said AIB’s IPO appears to be “on track”, subject to political considerations. “Certainly the optics look positive…and it’s really down to whatever happens on the political environment right now.”