Donohoe must ensure Goodbody deal doesn’t open back door to AIB bonuses

A government-commissioned report on pay across bailed-out banks, which is said to recommend an easing of pay caps and the ban on bonuses, has been gathering dust somewhere in Minister for Finance Paschal Donohoe’s office since June 2019.

Banks may argue that the restrictions of more than a decade have left them struggling to retain staff, especially as international financial groups expand in Ireland. And major institutional investors may like to see top executives in companies in which they are invested tied to reasonable incentive plans tied to performance, so that interest are aligned.

Bailout

But the political reality is that loosening the €500,000 bank CEOs pay cap and removing the prohibitive 89 per cent levy that applies to bonuses, enshrined in tax law since 2011, is going to be a tough call for any government to make - not least when the industry still hasn’t drawn a line under the tracker mortgage scandal and is still well off repaying all of its taxpayer bailout.

The Covid-19 crisis, and the impact it has had on households and businesses, has pushed the issue of banker’s remuneration even further down the agenda.

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However, 71 per cent State-owned AIB’s plan to buy back Goodbody Stockbrokers, a firm it was forced to sell a decade ago as it went through an EU restructuring plan tied to its bailout, is set to stoke the embers of the suppressed debate, because the plan is being formulated around the idea of the brokerage retaining its ability to pay bonuses.

Donohoe, of course, could put the kibosh on the plan and insist that the 89 per cent levy applies to Goodbody staff once they come under AIB.

But the commercial reality is that incentive-based remuneration is a key feature of the stockbroking and wealth management industry in Ireland, and beyond. It is used not only to attract and retain staff but also rein in costs during bad years in a highly cyclical industry.

Bonuses

Goodbody, which is 51 per cent owned by Kerry financial services group Fexco, with the remainder in the hands of management and some staff, has not paid bonuses in the past two years (though staff recently received a token gesture in the form of tax-free gift vouchers and there is talk of some sort of cash award ahead of a deal with AIB).

There is little point in AIB bank spending more than €130 million acquiring Goodbody (including the firm’s €60 million of excess cash and €20 million of regulatory capital reserves) and run the risk of some of its best people being picked off by rivals that have no variable pay restrictions. The alternative of jacking up fixed pay would also put Goodbody at a disadvantage in terms of managing costs when time are lean.

The reason why AIB is planning to buy the business in the first place is to help diversify earnings that continue to be squeezed by muted loan demand and ultra-low interest rates globally. The bank's chief executive, Colin Hunt, is also looking to set up a joint venture with Irish Life on the life and pensions front, almost a decade after putting its former Ark Life unit into wind-down.

Strategy

It’s all part of a strategy, unveiled in December, to keep the bank on track having a return on tangible equity (RoTE) - a key measure of profitability relative to shareholders’ equity - of more than 8 per cent by 2023. The cost-cutting side of the plan will involve the culling of a net 1,500 jobs, leaving some Dublin head office locations and exiting small business lending in the UK.

Eight per cent is double the figure reported by AIB for 2019. But it’s the minimum the bank needs to achieve if the Government is to have any chance of selling down more of its stake in the bank to claw back its crisis-era rescue bill.

To date, taxpayers have recovered just €10.7 billion of the €20.8 billion they were forced to pump into AIB to prevent its collapse a decade ago. A 65 per cent slump in the stock price since the Government sold shares on the market in 2017 has left its remaining stake wallowing at a value of about €3 billion - leaving more than a €7 billion paper shortfall in the State’s aim of retrieving its money.

Deal

Back in the Department of Finance, the Minister only needs to be consulted by AIB on deals of more than €100 million. However, he ultimately has the final say on the Goodbody transaction, because Hunt is said to be unwilling to proceed with a deal that effectively bans variable pay from continuing at the brokerage.

During AIB’s previous 21-year ownership of Goodbody up until early 2011, the brokerage was run as something of an independent fiefdom with little regard for its contribution to the wider group.

Few would know more about this than Hunt, a former Goodbody chief economist who worked for the firm between 1998 and 2004.

Extent

This time round, Goodbody must be properly integrated into AIB, if the bank and its shareholders are to reap the real benefits of ownership.

This means that in a few spots of overlap, like corporate finance or parts of wealth management, there is little point in having two teams competing against each other as in the past.

This may lead to a small number of middle-ranking AIB staff moving over in time to Goodbody, which, while likely to be politically contentious, makes commercial sense.

But Donohoe will need to ensure that this very limited, ringfenced, and the extent to which it applies is communicated very clearly by AIB.

The deal cannot become a back-door route to bonuses for AIB executives or turn Goodbody into a something of a recruitment vehicle for the bank as wider pay restrictions remain in place.