Four years ago, AIB offered its main board directors and other executives a long-term incentive. Directors Eugene Sheehy, John O'Donnell, Colm Doherty and Donal Forde would in time get free AIB shares if the bank hit certain profit targets.
In March this year, despite the collapse in AIB shares and the bank having to rely on the twin supports of Ireland's state guarantee and a promised €3.5bn injection of taxpayers' money, directors and other executives got their shares. The threshold on the performance targets appeared to be set so low that they qualified for the share perks regardless of the lending policies that effectively broke the bank.
Across the banking industry, board directors and executives typically built shareholdings through similar so-called long term incentive plans.
But Manifest, the international shareholder advisory group which detected and unpicked AIB's 2005 long-term incentives, said the case illustrates the problems with share-price incentives set by banking remuneration committees. Executives have in many industries, such as banking, been rewarded with high salaries, bonuses and share awards that fail to allow shareholders to claw back the incentives when things go badly wrong.
The AIB performance target was based on directors and executives meeting undemanding conditions. The shares would be paid if the bank hit certain earning targets and if total shareholder returns compared favourably with a group of 15 European banks.
The value of the share awards made to the AIB directors, which Manifest calculates were worth between €6,500 and €24,000 in March, will be worth much more today because AIB shares have since risen significantly.
"I was very surprised at AIB's performance share plan," said Manifest research manager Alan Brett.
Stock market announcements made by AIB in early March this year show that the directors met in full the earnings conditions set in the 2005 incentive plan and reached over 14% of the target for total shareholder return. That meant the executives qualified for about 65% of the possible awards in the incentive pot.
"In the banking sector we are increasingly seeing companies insisting on claw-backs for bonuses," said Brett. "Companies that did not have them are bringing them in. Bonuses that would typically, until the end of last year, be paid out each year will now be held back for anything up to three years."
Noting that AIB has since changed the conditions of its incentives, Brett said AIB had set the comparative returns against too small a group of 15 banks.
Fearing a shareholder revolt, UBS set the pace in European banking by scrapping bonus incentives that failed to assess executives over the long term. Since the start of the year the bank has put in place penalties, called 'malus' arrangements, that attempt to tie executive share awards more accurately to the long-term interests of all shareholders. Shareholders can hold back or claw back incentives paid to executives.
Manifest says institutional investor bodies, such as the Irish Association of Investment Managers here and its counterpart in Britain, have recommended that the review period under the 'malus' arrangements should extend to three years, at a minimum. But the three-year review period appears to have become a new industry maximum, raising questions as to whether three years is enough for shareholders to judge success or failure.
Here, incentive and other plans helped existing and former bank directors acquire large shareholdings, even when their banks were responsible for huge unsustainable levels of lending.
An analysis by the Sunday Tribune shows that a group of 14 existing and former senior AIB directors own about 1.48 million shares between them, worth last week about €1.94m. The directors have benefited from a near four-fold surge in AIB shares since early March, when they slumped amid fears that the size of the banks' bad debts would cut off Ireland from the international debt markets.
AIB shares at their peak in late February 2007 were worth €23.95 each. They traded last week at €1.31.
According to Bloomberg data, departing chairman Dermot Gleeson and chief executive Eugene Sheehy own 350,000 shares and 315,159 shares, currently worth €448,934 and €404,129, respectively.
John O'Donnell, Kieran Crowley and Colm Doherty own shares currently worth about €73,374, €16,054 and €125,112 respectively.
Former and current directors at Bank of Ireland have benefited from the surge in the bank's share price since March. The board owns about 1.73 million Bank of Ireland shares, worth €2.77m.
According to Bloomberg data, the bank's new chief executive, Richie Boucher, and financial officer John O'Donovan own shares worth €49,670 and €162,424 respectively.
Departing chairman Richard Burrows and former chief executive Brian Goggin own shares which last week were worth €647,361 and €904,245 respectively.