Is Lloyds Banking Group PLC’s Future In Jeopardy?

The subject of City pay packets is always a touchy subject. On one hand, the City has to remain competitive and pay should be equal to, or better than, what’s on offer in other regions around the world, to attract the best talent.

On the other hand, some believe that large pay packets encourage risk taking and bankers are over compensated for risking other people’s money. This is especially true when staff act in a way that jeopardises the stability of the bank, or financial system.

Claw-back

Lloyds (LSE: LLOY) (NYSE: LYG.US) has got around this issue by clawing back bonuses issued to those bankers who have acted in an illegal, or reckless manner over the past decade. Indeed, the bank recently dismissed eight employees and recouped £3m worth of bonuses after finding that the employees in question had attempted to manipulate benchmark interest rates between 2006 and 2009.

Unfortunately, this £3m claw-back was only a fraction of the £226m Libor manipulation fine Lloyds was ordered to pay to US and UK authorities. Still, this was the second time that Lloyds has cancelled unvested bonuses in response to wrongdoing.

Last year the bank took back remuneration from eight people who were implicated in the payment protection insurance mis-selling scandal. Those asked to give back bonuses included former chief executive, Eric Daniel.

Strict rules

To encourage responsibility within the banking industry, the Bank of England is set to introduce a set of strict rules on bank bonuses next year. 

The BoE’s rules will force bankers to hand back bonuses up to seven years after they are awarded, if employees are found guilty of misconduct. This applies even if the banker has already spent the money. 

Unfortunately, while these rules are designed to promote responsibility within the banking sector, the British Bankers’ Association believes that the rules will put UK at a competitive disadvantage.

For Lloyds this could be a big problem. Part of the bank’s restructuring plan has been to sell off international operations, in order to focus on the UK. Specifically, the bank has now exited, or announced the exit from over 20 countries. Lloyds now only operates within 10 countries.

As a result, the bank could find itself the victim of a brain drain, where employees leave the bank in search of better employment prospects overseas. This really would put Lloyds at a competitive disadvantage to its peers, many of which still operate large overseas divisions.

It’s not over yet

A brain drain would impact Lloyds’ future growth. If that concerns you, then I strongly recommend that you do your own research before making any trading decision.