Financial News

  • 6 February 2014, 1:41

Lloyds And UKFI Thrash Out Chief Exec's Bonus

The chief executive of Lloyds Banking Group will have his 2013 bonus linked to a long-awaited resumption of dividend payments or a further sale of taxpayer-owned shares under plans being thrashed out with its biggest investor.

Sky News has learnt that the Lloyds board is in discussions with UK Financial Investments (UKFI), the bank's biggest shareholder, about the terms on which Antonio Horta-Osorio will be awarded an annual bonus in the coming weeks.

Sources indicated on Tuesday that while discussions were ongoing, the bonus was likely to be worth between 1.5m and 2m after Lloyds signalled this week that it would return to the black for the first time in three years.

Mr Horta-Osorio's bonus, which insiders say he plans to accept as he did last year, will be awarded in shares and deferred for at least five years.

On Monday, Antony Jenkins, chief executive of Barclays, said he would waive his 2013 bonus, which was understood to have been worth just over 1m.

Insiders said that Mr Horta-Osorio's ability to receive his award would depend on a number of conditions still being negotiated between Lloyds directors and UKFI, which manages taxpayers' 33% stake in the bank.

Those conditions have yet to be finalised but talks are understood to be focused on Lloyds resuming a dividend payout to ordinary shareholders, a further sale of the Government's stake in the bank during the next 12 months and a possible share price hurdle linked to profitability for the taxpayer.

Such a structure would echo an arrangement devised last year, which saw Mr Horta-Osorio's bonus for 2012 vest if Lloyds' share price traded above the average price at which taxpayers invested in the bank during the 2008 financial crisis.

Under the terms of his contract, Mr Horta-Osorio is eligible for a maximum annual award of 2.387m, equivalent to 225% of his 1.061m basic salary.

Lloyds directors are said to be planning to award the bank's chief executive a bonus of between 1.5m and 2m, with board members determined to pay him based on the ongoing improvement in the bank's performance.

At Tuesday's closing price of 81.05p, that would mean handing Mr Horta-Osorio a bonus consisting of more than 2m shares.

Paradoxically, the 60% surge in Lloyds' share price during the last 12 months means that the number of shares awarded to Mr Horta-Osorio will be smaller than the 3.01m handed to him in March last year.

Then, with the Lloyds share price hovering around the 49p mark, the award amounted to a bonus worth 1.485m.

By the time the qualifying condition was met in November, however, with the shares having traded above 73.6p for 30 consecutive days, the bonus was worth 2.3m, although the Lloyds boss will not take ownership of the shares until 2018.

The change in value underlines one of the unintended consequences of rules requiring that bank executives' bonuses should be paid in the form of deferred shares instead of cash.

The bank said last year that the vesting conditions were inserted at the request of Mr Horta-Osorio himself.

Mr Horta-Osorio is regarded as having done a decent job in accelerating the transformation of Lloyds following his arrival in 2011.

However, the news of a substantial payout may yet prove contentious after the bank added a further 1.8bn to its bill for payment protection insurance compensation. Its liability for the scandal, which pre-dates Mr Horta-Osorio's tenure, now stands at close to 10bn.

On Monday, the bank said it anticipated reporting an underlying profit for 2013 of 6.2bn and a small statutory pre-tax profit once mis-selling provisions had been accounted for.

"Subject to a return to sustainable profitability and there being no major unexpected changes in the Group's business outlook or regulatory requirements, the Board expects that it will apply to the PRA [Prudential Regulation Authority] in the second half of 2014 to restart dividend payments," Lloyds said.

George Osborne, the Chancellor, is being kept informed about the discussions over the Lloyds boss's pay.

He is said to believe that Mr Horta-Osorio has done a good job, helping the taxpayer to make a small profit by some measures from the first sale of the Government's stake in the bank last autumn.

A Treasury source said the Chancellor was insistent that the Lloyds chief's pay should be aligned with the interests of taxpayers.

Mr Osborne is now planning further share disposals, which will include a substantial offering to retail investors later this year.

In addition to his annual bonus, Mr Horta-Osorio is also eligible for an award under Lloyds' long-term incentive scheme, which entitles him to a maximum annual award of roughly 3m subject to performance criteria.

News of the discussions about Mr Horta-Osorio's remuneration comes on the day he laid out a series of new targets for the bank.

They include commitments to the number of women in Lloyds' management ranks, lending to first-time homebuyers and small businesses, and donations to the bank's charitable foundation.

Lloyds may announce the details of Mr Horta-Osorio's remuneration alongside its annual results next week, although it could opt to do so in its annual report, which will be published next month.

Lloyds and UKFI declined to comment on the bonus discussions.

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