The Winters of their discontent

The conversation moved on, but it was enough to warrant the headline: “StanChart chief blasts investors as ‘immature’ over pay revolt”. (His quote, by the way, could equally have been a request to his interviewers to keep things in perspective.) And, such is the nature of these things, it was picked up by other media across the world, and even sparked headlines such as: “Downfall of a banking hero”. This was hardly fair. The real target should be StanChart’s remuneration committee. These independent non-executive directors are the ones who reviewed Mr Winters' pay. Those in 2015, when he became chief executive, would have recommended the terms of his contract to the board. Since then, the UK Corporate Governance Code has changed. Its 2019 initiative was for executive pensions to be more aligned with those of the workforce, where pension contributions are typically 10 per cent or less of salary. And Mr Winters’s are way above this. 

The Investment Association’s Good Stewardship Guide suggests that where pension contributions to existing directors are out of line, they “should be reduced over time”, but StanChart’s remuneration committee said that they’d agreed to keep pensions at “20 per cent of total salary for existing executive directors to fulfil existing contractual requirements”. This seemed to be okay with its institutional investors in meetings ahead of the annual meeting, but on the day there was a 36 per cent vote against the policy. Maybe shareholders had been influenced by proxy advisers.

Semantics

When is a salary not a salary?  In the table below (which uses StanChart’s terminology) is it the “salary” or the “total salary”?

The Governance Code says: “Only the basic salary should be pensionable.” That sounds conclusive. Critics said that at 40 per cent of salary, his pension is greater than for any other FTSE 100 chief executive. Christine Hodgson, who chairs StanChart’s remuneration committee, was called “disingenuous” for her “pretence” that the figure for Mr Winters is 20 per cent.

The roots of this go back to the aftermath of the banking crisis 10 years ago. In the backlash against bankers’ pay, there was a general resentment that those running banks were getting away scot-free. To make them more financially accountable, they needed to be paid in shares, and they needed to keep those shares for much longer. Bonuses were clamped down on. A move to limit performance related pay (variable pay) to no more than the salary was diluted to a maximum of twice the salary. So a rebalancing took place: potential variable pay was cut, and salaries went up. 

Salaries were next in the firing line. For bank executives, half their basic salary now has to be paid in shares. Only a fifth of these salary shares can be released each year, so Mr Winters won’t get the whole of his 2019 salary until 2024. If StanChart had called his 2018 “salary” a “cash salary”, and the “fixed pay allowance” his “salary shares”, then his pension would be 20 per cent of the sum of these – not of the “total salary” but of his “basic salary”.  Job done.

Size matters

But there still remains the scale of his pay. £3m just for turning up for work is somewhat generous. And there’s that £0.5m pension. This column has argued before that executive “pensions” are a misnomer.  More correctly, they’re “cash in lieu of pension allowance”. That’s what HSBC (HSBA) calls them. They’re not tax deductible and so aren’t like the pensions that the workforce gets. They’re just an additional part of guaranteed pay. They’re not included in the salary because the salary drives the variable pay, and many consider that to be high enough anyway.

Last year, Mr Winters also received £1.4m as a woefully named “annual incentive award”. Woeful because if anyone at this level needs to be incentivised by money, they shouldn’t be doing the job (but then its former name, 'bonus', in the context of bankers is probably more toxic). Half of this was in cash, and half in shares that he has to hold for a year. But then he’ll have to wait 10 years to be sure that he won’t have to pay any of it back. That could happen for a number of reasons, such as if “inappropriate valued behaviours” are later identified, or if it turns out that he’s been applying a “lack of appropriate supervision”. 

He also received £1.6m from the first three-year LTIP (the equally woefully named Long Term Incentive Plan) that he was awarded when he joined StanChart. That was only 27 per cent of what it might have been – it’s good to see that the performance conditions weren’t too easy. This pay is all in shares and, although they’ve now been released to him, they can’t be sold for up to 10 years. He might have to pay back these as well. True, it’s unlikely that these awards will actually be clawed back, but even so, the possibility adds more uncertainty to his pay.

So, in total, that’s £6m for last year. Since he became chief executive four years ago, he’s received over £15m.  And that’s without the £6.5m that StanChart had to pay him to compensate “for the forfeiture of share interests on joining from his previous employment” (Renshaw Bay, the asset manager he’d helped to set up in 2011). But all this needs to be seen in context. Until 2009, he was co-head of JPMorgan.  He earned substantially more there.

For Mr Winters, being paid in shares and having to hold on to them for so long is a significant personal risk.  By the end of last year, he’d accumulated 1.5m StanChart shares. Another 2m are subject to performance conditions, but he’s expected to end up with about half of these. A nice problem to have, of course, but there are only a few windows each year when he can sell them. And chief executives are encouraged not to sell for fear of sending the wrong signal to the market.

The real incentive

The remuneration committee is hardly likely to risk upsetting Mr Winters by quibbling about his pay. That too could send the wrong signal. Highly paid chief executives are often more concerned about their reputation than their money. They aim to leave their companies in a better shape than when they joined. They might regard pay as a tangible measure of how much they’re appreciated, but what really drives them on are the challenges.  

And StanChart has plenty of those. Mr Winters arrival was part of a shakeout of its key people in 2015. Its chief executive (who’d steered it through the 2008 banking crisis), its chairman, and four other directors all left at near enough the same time. Mr Winters had the reputation for being a strong leader, astute with risk, and with a tremendous work ethic, while being admired for his humour, humility and graciousness. He was rumoured at the time to have turned down offers to lead other large banks. StanChart’s investors were desperate for an exceptional person to dig them out of a hole. The cost was by the way. Netting him was widely regarded as a coup.

New horizons

How other banks defined “salary” rather undermined StanChart’s stance on executive pensions. Lloyds Banking (LLOY) shaved a quarter off its chief executive’s “pension” contributions. And a month before StanChart’s annual meeting, HSBC had gone the whole hog. It cut the “cash in lieu of pension allowance” to John Flint, its chief executive, and also to its two other executive directors, from 30 per cent of their cash salaries to 10 per cent. 

Except it wasn’t quite as easy as that. You can’t just cut someone’s pay. It would breach their employment contract. HSBC’s executives “listened and reflected” before agreeing to the cut. That’s how Pauline van der Meer Mohr, who chairs its remuneration committee, put it at its annual meeting, rather suggesting that theirs was a reluctant decision.    

There are other reasons, of course, why Mr Flint, who’d worked for HSBC for three decades, “stepped down” earlier this month. Apparently, HSBC needs a new chief executive to respond to “an increasingly complex and challenging global environment”. But wasn’t it ever thus?

If Mr Winters is after a more challenging role, he doesn’t have far to look. And if Mark Tucker, who chairs the HSBC Group, is determined to have an external candidate to replace Mr Flint, then nor does he. Mr Winters is an obvious choice, even though HSBC’s sheer size and complexity can snarl up apparent solutions with knock-on effects that can catch those new to the group unawares. 

Those managing the succession might dismiss this sort of speculation as a distraction. Some of them, no doubt, might even call it immature and unhelpful.