Virgin Money UK raises bar for executive bonuses

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Virgin Money UK is raising the performance targets that underpin its executive bonuses, following complaints from shareholders that the benchmarks were too low.

The retail bank on Thursday said it would increase the threshold above which its executives were eligible for a significant minority of their bonuses, which are tied to the bank’s performance. Virgin Money, which missed profit expectations recently, is to raise by two percentage points the performance target tied to its bonus scheme.

As much as 40 per cent of bonuses pocketed by Virgin Money’s executives are underpinned by hitting this profitability benchmark, which requires the challenger bank’s minimum return on tangible equity, or Rote, to hit 8 per cent rather than the current 6 per cent.

The bank is targeting 8 per cent Rote for 2024. By comparison, NatWest and Lloyds, the country’s two largest retail banks, achieved Rote of 17 per cent in the first nine months of 2023.

“In the context of feedback received, it is acknowledged that the lower end of the proposed [target range] is not at a level that should merit an award even at the threshold payout level,” Virgin Money’s board wrote in its annual general meeting report.

Virgin Money’s performance has been lacklustre. It was hit with rising credit card arrears due to the cost of living crisis, leading it to miss profit expectations in November. It reported statutory profit before tax of £345mn in the year to September 30, down from £595mn in 2022 and below analyst forecasts of £430mn. Meanwhile, its shares have plummeted 21 per cent over the past year.

“While the new targets are hardly standout, they are better aligned with shareholders,” said Jonathan Pierce, an analyst at Numis. The previous structure “awarded returns well below the cost of capital and the group’s own stated ambition of double-digit returns” and suggested a “lack of ambition”, he added.

The tightening of Virgin Money’s performance metrics comes as UK banks are under pressure to boost their lagging share prices and attract investment. Chancellor Jeremy Hunt on Tuesday summoned the chiefs of the country’s largest banks to address the issue and discuss ways to boost the City of London’s attractiveness on the global stage.

Virgin Money’s updated bonus scheme will target a Rote of 9 per cent, with a minimum eligibility threshold of 8 per cent and a ceiling of 10 per cent. This means if it achieves 10 per cent, executives will receive the full 40 per cent of their bonuses. The bank said the increase was more “aligned with current consensus”.

It told the Financial Times that the change “reflects the group’s desire to ensure the range of Rote targets only deliver a payout at an acceptable outcome for all stakeholders”.