If you’ve ever wondered why non-executive directors of banks are paid five times the national average wage for a (very) part-time job, the Prudential Regulation Authority may have an answer: it’s danger money. Under proposals covering the so-called Senior Manager’s Regime, non-execs could find themselves threatened with bankruptcy or even jail if their bank fails.

The proposals spring from the understandable resentment that the non-execs failed to spot anything amiss in the run-up to the banking crisis. Where they should have been restraining, or at least challenging the exuberence of the executives, they nodded everything through and collected the fees.

Most of them have now gone, but the current generation of noddies is apprehensive. They worry about personal liability, and can point to a consultation paper from the PRA last year which suggested that senior managers could face prosecution. But cheer up: such prosecutions are “likely to be rare”, because bank failures are so unlikely now the regulations have been tightened up.

This is hardly reassuring, and so next month a posse of City bankers will meet the Bank of England to argue that the pendulum has swung too far. Bankers may remain hate figures in the public eye (there’s much to hate) but they seem to have a point here.

As we have so painfully learned in the last decade, banks are too complicated for their executives to understand. Matt Spick, the banking analyst at Deutsche Bank, has bravely admitted that reporting “has become so complex it has spiralled out of control”, citing the 868 page blockbuster that is UBS’s report and accounts. If he’s struggling, there’s not much hope for the rest of us.

Non-execs are not paid to win Mastermind on credit derivative swaps. They are there to ask awkward questions, offering support to the execs while restraining their more megalomaniac or self-serving impulses. Even at five times the national average wage, few suitable people will step up to take the risk of personal ruin if their bank fails. Putting the assets into your spouse’s name somehow won’t quite do.



Life in annuities after all

Just Retirement Group, the impaired life annuity provider,  suffered a very impaired corporate life when the chancellor scrapped compulsory annuities last year. From that near-death experience, the shares have recovered half their collapse, as it seems that the demise of annuities had been greatly exaggerated. As sales slumped, the company has scrambled into the business of bulk annuities. Chief executive Rodney Cook sounded quite chipper in the latest trading statement. He’s looking forward to the proposed secondary market in annuities.

Pensions expert Ned Cazalet points out that annuities may get a second life as insurance policies, since today’s fit 65-year-old can expect half of his remaining life to be “impaired”. For a buyer at, say, 85, each year makes death (cheap) or geriatric care (expensive) more likely, allowing the likes of Just Retirement to offer attractive terms.

At 65, by contrast, annuities really are the terrible value they look at first sight, especially the inflation-proofed policies. Mr Cazalet calculates that if inflation is 3 per cent, our annuitant would not be better off taking the best indexed policy on today’s market unless he lives to age 101.

The perils of high pay

The confusingly-named High Pay Centre is not a club for over-rewarded executives, but a think-tank that casts a critical eye on fat-cat emoluments. It has concluded that long-term incentive plans (LTIPs) are a bad idea. Furthermore, it suggests that bonuses should be paid in cash not shares.

The HPC argument is that the focus on profits and earnings per share – the standard ingredients in LTIPs – so distort the executives’ decision-making that the interests of the business they run are undermined. Moreover, deferring rewards has just meant they are bumped up to compensate for the delay in getting them.

If the HPC is right, it’s an example of changes producing the opposite effect to that intended. However, the suspicion is that like so many others, it can’t see why the rewards are so high in the first place. Were they less egregious, nobody would much mind how they were structured.

This is my FT column from Saturday