James Daley

By James Daley

Stock market flotations are fantastic at making people rich. Shares that previously were all but impossible to sell are suddenly tradeable on the London Stock Exchange - and as businesses come to market, it's customary for the senior directors to be given the chance to sell some of their holdings immediately, while being handed an additional allocation of shares which they can cash in over the next few years.

Such was the story last week, as Virgin Money was finally floated on the stock exchange at 283p a share. This valued the company at just over £1.2bn - peanuts compared to the £55bn and £44bn respectively that Lloyds and RBS are worth. Size-wise, it's in the same ball park as TSB, another new kid on the block that floated back in the summer.

Restoring trust in banking

Given the bad reputation that the banking sector has built for itself over the last few years, any challenger bank needs to work hard to demonstrate that it is committed to doing things differently. This has to include showing some restraint when it comes to pay - not least because so many of the problems caused by banks over the past two decades have been driven by inappropriate incentive and reward structures.

Sadly, Virgin Money appears to have fallen at this very first hurdle - handing shares worth £8m to chief executive Jayne-Anna Gadhia. Some £2m of this was cashed in during the float, while the rest will mature over the next two and a half years. Meanwhile, even chairman Sir David Clementi was on the end of a windfall of more than £1.7m. For a company of Virgin Money's size, these rewards are over the top, and undermine the credibility of any promises the group may make about its intentions to reinvent banking.

It's hard not to make comparisons with TSB - a bank of a similar size, which was floated just five months previously. Like Virgin, it aspires to make a virtue of being a challenger bank that does things differently. Unlike Virgin, however, its directors were willing to put their money where their mouths were.

Leading by example

TSB chief executive Paul Pester was allocated a much more modest £100 in shares - like every other TSB employee - when his company was floated. Although he was also given around £2m in Lloyds shares, as reward for his work in completing the transition. Perhaps more impressively, he accepted what - in banking circles, at least - would be regarded a relatively modest salary package for someone of his seniority. While his base salary of £700,000 is similar to Gadhia's - he cannot take home a bonus of more than 100%, whereas Gadhia's bonus is capped at 200% (down from 300% last year).

Pester has also capped his own remuneration at 65 times that of the lowest paid employee in the company. This may still be far too high for the likes of most us in the real world, but in banking, it certainly passes for real restraint. Pester is even on the record saying that he is "not interested in hiring someone who is all about getting a bigger yacht than the guy next to him – they can go and work for another bank". If he succeeds in keeping the yacht-seekers out of his house, he has every chance of building a bank that delivers good outcomes for its customers.

It's my firm belief that culture in a company flows from the CEO down. There can't be one rule for the boss and a different one for everyone else. I've worked in companies like that, and the culture ends up  damaged.

Virgin Money is lacking some of the humility that is required to succeed as a challenger in today's banking world. One only need look at Sir Richard Branson's angry dismissal of allegations that his tracker investment fund is too expensive, to see that this is not an organisation that is focused on reinventing banking. It is looking to leverage the public's distrust in the old guard, and gamble on the fact that the Virgin brand, with its banking lounges and coffee shops, will look sexy in a drab world. This may work in the glamorous airline industry - even in TV and telecommunications - but I'm just not sure that "sexy" will cut it in the world of standing orders and direct debits.

I wouldn't buy shares in TSB either just yet. It's got more to prove before it can make the case that it really is the bank it aspires to be. But if I had to pick between TSB and Virgin Money, I'd go for for the organisation where the CEO is willing to challenge the status quo - starting with his own pay packet, and the incentive structures throughout his company.

I sincerely hope Virgin doesn't blow the opportunity it has - the banking sector needs another bold competitor. But the early signs are not so encouraging.