The “John Lewis” of banking? Not with this level of bonus

It’s a measure of how inured we have become to the excesses of bankers, and how numbed by high numbers, that when TSB announced its pay policy recently a limit on the maximum pay of its chief executive to £1.65 million — 65 times the average salary of its ordinary staff — could be presented as modest.

TSB has been created by hiving off the 650 branches LloydsTSB demanded by the European Commission as the price for its rescue by the UK Government, following Lloyds’ disastrous acquisition of the hopelessly insolvent HBOS.

The new  bank has an old name, going back to the Trustee Savings Bank movement, started in Dumfriesshire by the Rev Henry Duncan in 1810. But that is where the similarity ends. The old TSB was mutually owned by its customers, although they received nothing for their shares when it was controversially privatised in 1986 and soon after blew a large part of its capital by over-paying for the merchant bank Hill Samuel. Acquisition by Lloyds followed a few years after.

The new TSB is still owned by Lloyds, but after plans to sell it to the Co-op Bank fell through, the proposal is to float it on the stock market later this year.  The board has decided that each of the 8,600 staff will be given £100 worth of shares to encourage a “John Lewis Partnership” model.  “I believe a sense of shared ownership amongst TSB staff is key to delivering a consistently great customer service – and to building a thriving TSB bank,” said Paul Pester, the chief executive.

There will be big differences.  John Lewis Partners — the whole 91,000 staff — effectively own the business. There are no outside shareholders. When TSB floats, its employees will own less than one per cent of the business. Their chances of influencing its policy are vanishingly small.

Mr Pester is kidding himself — or trying to kid us — if he believes that giving staff shares will set the culture of the bank.

Mr Pester is also kidding himself — or trying to kid us — if he believes that giving staff shares will set the culture of the bank. Most of the staff in RBS and HBOS owned shares through the two banks’ sharesave schemes. They were among the banks’ most loyal shareholders. It was common for them to invest all their annual bonuses in their employer’s shares and they were the last to sell — indeed many held on until the end, believing the propaganda of their bosses that the banks were safe and that share prices in free fall would eventually recover.

Yet in the years leading up to the crash in 2008 these same staff were bullied, cajoled and bribed to operate high-pressure sales models which put market share above prudent lending and bank profit above their customers’ interests. The PPI scandal, when millions of people were sold insurance policies on which they would never be able to claim, illustrates the contempt with which these two banks treated their customers. The current managements and staff are striving to overcome the legacy of mistrust which those years produced.

Another major difference between TSB and John Lewis will be the bonus system.

Another major difference between TSB and John Lewis will be the bonus system. In the stores group it is beautifully simple. An annual bonus is declared as a percentage of salary, based on the financial performance of the firm. There are no LTIPs, long-term, short-term, cash-based, share-based, options or any of the other fancy gimmicks beloved of remuneration committees in banks. Every employee, from the shelf stackers and counter staff to the chief executive and the executive chairman, Charlie Mayfield, receive the same percentage. Last year it was 15%.

The TSB board, by contrast, in order to show its frugality and set a precedent, has limited Mr Pester’s bonus to 100% of salary. The bank feels it is showing admirable restraint because it could have asked its shareholder (currently Lloyds) for permission to pay bonuses of up to 200%.

Mr Pester is, I am sure, an able chap —although he has no banking qualification and leads a team with backgrounds in accountancy and management consultancy. Only one of the executive group is a career banker — so much for the lessons of history and the recommendation of the Parliamentary Commission on Banking Standards. Provided they resist the temptation to get into areas they don’t understand, they should do well. The new bank will start with a clean balance sheet and the lack of competition in the UK banking market means they will be able to wring large profits out of customers.

But if Mr Pester really does want to emulate John Lewis he ought to realise that culture is set from the top.