Lloyds Banking Group PLC said Monday that it will claw back part of the bonuses it awarded top management in 2010 following an insurance payment scandal, the latest example of a financial institution looking to recoup pay from executives.
Lloyds said it will cut the bonus of former Chief Executive Eric Daniels by around £580,000 ($918,000) after an insurance-sale debacle resulted in the U.K. bank paying hefty compensation to consumers. Daniels, who stepped down last February, was awarded a £1.45 million bonus for 2010. Four other Lloyds directors will see their bonuses cut by a quarter, the company said. Eight other top executives will have their bonuses cut by 5%. All the bonuses are set to vest in 2013.
The decision comes as banks look to tighten their grip on remuneration. Earlier this month, UBS AG told staff that it was clawing back half of the share-based bonuses awarded to investment bankers whose bonus pay was above $2 million last year. Goldman Sachs Group Inc. and Morgan Stanley have both recently warned employees that their bonuses could be reclaimed if they put their bank at risk of substantial legal or financial problems.
At Lloyds, the clawback is linked to the sale of payment-protection insurance, or PPI. This insurance was often sold alongside loans so that borrowers could continue repayments in the event that they lost their jobs or fell ill. U.K consumer groups have alleged that this insurance was sold improperly to many consumers who didn't qualify or weren't aware they had bought it.
Last year, Lloyds set aside £3.2 billion to compensate consumers who were wrongly encouraged to buy the insurance. Following pressure from shareholders and the U.K. government, which owns a 41% stake in the bank, Lloyds decided to reduce 13 of its top executives' 2010 bonuses. In a statement, Lloyds said the reduction in bonuses was in "in no way" an admission of guilt by the individuals concerned.
Daniels didn't return a call seeking comment.
Lloyds reasons that its earnings would have been hit had the outcome of a judicial enquiry into PPIs been known in 2010, meaning 2010 bonus payments to its top executives would have been lower.
The decision marks the first time that a major U.K. bank has exercised a "clawback" option on bonuses. The ability to reclaim bonuses was introduced by the U.K. financial regulator, the Financial Services Authority, in 2009 in an attempt to better link pay to performance.
Following the PPI scandal, U.K. banks have set aside an estimated £6 billion to cover for eventual claims. Payments continue to weigh on the banks and stoke shareholder ire. The move by Lloyds could spur competitors such as Royal Bank of Scotland Group PLC to follow suit, analysts say. RBS has already set aside £850 million to cover PPI claims on top of the £100 million it provisioned the year before, a spokeswoman said.
HSBC Holdings PLC has provisioned $440 million, and Barclays PLC said it is earmarking £1 billion to PPI customers.
Lloyds is expected to give further details about the bonus reduction when it reports full-year earnings on Friday. Daniels's successor, Antonio Horta-Osório, gave up his 2011 bonus after taking several months' sick leave.
This story originally appeared on WSJ.com.