In a notable development within the UK's banking sector, major banks are anticipated to secure approval for significant pay increases in the near future. This comes after they successfully persuaded influential shareholder advisory firms that a more than 40% hike in maximum payouts for chief executives would enhance their competitive edge in the financial landscape.

Prominent proxy advisory services, Institutional Shareholder Services (ISS) and Glass Lewis, have recently endorsed plans put forth by NatWest, Barclays, and HSBC to substantially boost potential payouts, particularly following the removal of the UK banker bonus cap at the end of 2023. This regulatory change has been a pivotal factor in the discussions surrounding executive compensation.

NatWest Group has proposed a staggering 43% increase in the maximum salary for its chief executive, Paul Thwaite, allowing him the opportunity to earn up to 7.7 million for a single year of work. In contrast, CS Venkatakrishnan, the chief executive of Barclays, could potentially rake in as much as 14.3 million, representing a 45% increase, contingent upon shareholder approval of a new pay policy scheduled for a vote next month. Likewise, HSBC is advocating for a 43% increase in the maximum payout for its chief executive, Georges Elhedery, which could amount to approximately 15 million.

Both Glass Lewis and ISS have urged shareholders to be mindful of the considerable pay increases but ultimately sided with the banks' remuneration committees. They argued that these adjustments are essential for maintaining competitiveness against rival financial institutions, particularly those on Wall Street. For instance, Jamie Dimon, the chief executive of JP Morgan, received a substantial compensation package of $39 million (29 million) last year, underscoring the high stakes involved in retaining top executive talent.

Compared to these peers, Barclays pay proposals are well below market, ISS noted in its report ahead of the bank's annual general meeting (AGM) next month. The banks contend that without competitive compensation, attracting and retaining top banking talent could become increasingly challenging.

ISS has acknowledged an ongoing dialogue regarding the competitiveness of executive pay within the UK market, especially for companies with a global footprint and significant exposure to the U.S. market. The London Stock Exchange, along with city lobby groups like the influential UK Capital Markets Industry Taskforce (CMIT), has asserted that elevated pay is crucial for attracting top-tier talent and US businesses to the UK.

Interestingly, NatWest, which traditionally lacks an international presence, has also managed to garner support from proxy advisers. Glass Lewis pointed out that the banks current incentive structure is lower than that of its UK counterparts, as NatWest is the only major UK bank that had not previously sought shareholder approval to raise its variable pay cap from 100% to 200% of fixed pay.

In a significant shift toward full privatization, NatWest is expected to eliminate its remaining government shareholding and return entirely to private hands within the coming weeks, a move that would facilitate the proposed pay increases.

The backing from ISS and Glass Lewis for these pay raises signifies a notable change in shareholder sentiment and coincides with a backlash against the previously dominant focus on environmental, social, and governance (ESG) standards. The emphasis on ESG criteria had previously led to numerous shareholder revolts concerning executive pay during the early 2010s, including significant unrest at HSBC and Barclays, as investors called for a more prudent approach from corporate executives in the wake of the 2008 financial crisis.

However, recent concerns about the UKs global standing following Brexit, paired with Donald Trumps stringent policies regarding progressive initiatives such as diversity, equity, and inclusion (DEI), have contributed to a tangible cultural shift within corporate governance. In February, ISS bowed to societal pressures regarding DEI, announcing it would not advise against any US board members solely based on their failure to meet gender and ethnicity leadership targets.

Additionally, both Glass Lewis and ISS have faced mounting pressure from prominent chief executives, including Dimon, who criticized the proxy advisors for wielding excessive influence over shareholders. He has also raised concerns about their ownership, noting that Glass Lewis and ISS are owned by Canadian and German firms, respectively.

I question whether American corporate governance should be dictated by for-profit international institutions that may harbor their own strong opinions about what constitutes effective corporate governance, Dimon remarked.

NatWest is set to hold its annual meeting on April 23, while HSBC plans to host its shareholder meeting on May 2, followed by Barclays on May 7. As the discussions around these pay increases unfold, the banking sector stands at a crucial intersection of competitive strategy and corporate governance.