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New Central Bank chief wants salary cap lifted

THE new governor of the Central Bank has come out against capping the salaries of top-earning bank executives.

In an exclusive interview with the Irish Independent, Dr Patrick Honohan said banks risked losing out on the best candidates if they could not offer competitive pay packages.

"Around the world, people are becoming less keen on absolute ceilings on earnings. If you do that, you can end up losing the people you want to keep," Dr Honohan said in his first major interview since his appointment.

The governor was speaking as Allied Irish Banks bowed to government pressure to cap its executives' salaries after an extraordinary stand-off between the bailed-out bank and Finance Minister Brian Lenihan.

Dr Honohan said attention would have to shift from salary caps to the bonuses paid to top executives to ensure they did not encourage risky behaviour.

He said he recognised public concern about high salaries, but added the important thing was to ensure that such payments did not encourage bankers to make risky loans.

"The focus in other countries is already on reducing the payment of short-term bonuses, before the consequences of executive decisions become clear. We have to try to align the incentives for chief executives of banks with the common good of the community," he said.

"The minister has discretion on the payment ceiling. I don't think he will adopt a dog-in-the-manger attitude."

At present no bonuses can be paid to executives of state-guaranteed banks, although some have been deferred. Bonus payments are expected to return eventually, but in line with revised international guidelines.

The governor also promised to get tough on errant bankers.

"We must enforce both the rules that are there, and the principles which have been laid down. I am prepared to take court action, especially if some past behaviours re-appear," Dr Honohan said.

Pressure

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AIB yesterday bowed to intense public pressure to shave €130,000 off what it planned to pay its new managing director Colm Doherty to bring his salary to €500,000, in line with the government cap on state-guaranteed lenders.

The Irish Independent has also learned that the half-million-euro cap on top bankers' pay does not include the value of their pension contributions.

On top of his basic €500,000 salary, Bank of Ireland chief executive Richie Boucher was also entitled to a €220,000 pension contribution from the bank, but voluntarily agreed to reduce this to €123,000.

When asked whether Mr Doherty's pension would bring his package above €500,000, an AIB spokesperson said the cap was on salary and that his remuneration was "fully compliant with terms agreed with the Department of Finance".

It also emerged that large investment funds put intense pressure on AIB over the past week to make sure that chairman Dan O'Connor would take on the executive chairman role for just six months to ensure a smooth transition period.

Mr Doherty is then likely to become sole chief executive.

Mr Lenihan vetoed AIB's initial plan of naming Mr Doherty as chief executive, but it is believed his title will eventually change to this when the whole management structure comes up for review next year.

AIB yesterday said it now expected losses on bad loans to hit €5.3bn this year -- €1bn more than previously estimated. The increase is largely due to the bank trying to absorb as much as possible of the losses on the €24bn loans it is transferring to NAMA as quickly as possible.

AIB also confirmed yesterday that the outgoing chief executive of the National Treasury Management Agency, Michael Somers, would be appointed as deputy chairman of the banking group. His brother, businessman Bernard Somers, was a director until last December.

Mr Lenihan last night attempted to play down talks of a rift between the Government and AIB, insisting that relations were "okay now".

But government sources expressed amazement at the lack of political and media awareness within AIB.

AIB claimed it was having difficulty attracting candidates for the post, not just because of the salary cap but also the level of media scrutiny. The bank said it looked all around the world for a suitable person.

Eyeballing

AIB non-executive director Sean O'Driscoll rejected the accusation the bank was giving two fingers to the taxpayer and the Government. "AIB, or the director of AIB, are not in the business of eyeballing the Government," he said.

Fine Gael's enterprise spokesman Leo Varadkar said the key point was not the salary cap, but the appointment of an "inside man", rather than an external appointment.

"The banks wanted an insider for this job. They've got that. He's lost," he said.

Labour finance spokesperson Joan Burton claimed the "old guard" was still operating in the banks.


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