The Bonus Culture Or Rather What’s Left Of It?

The bonus season is upon us. Banks have been announcing their results, as well as the size of their bonus pools. Overall, due to their modest performances, the need to increase their capital base and bowing to public and political pressure, bonuses are expected to fall. The ONS’ estimate for 2011/12 had already put bonuses paid in the finance & insurance sector at around £13bn. This was lower than the previous year’s at £15bn and well below the £19bn paid before the beginning of the banking crisis in 2007/2008. Now the whole concept of City bonuses is under scrutiny.

bonus-graph

Source: ONS

Banks have been taking some measures in order to curb bonuses…

A couple of years ago, a foreign bank, with significant operations in the City, took measures to retain bankers by increasing fixed salaries, thereby averting the controversy of announcing annual bonuses. This idea seems to me rather dangerous and possibly counterproductive for shareholders. It may lead to high reward in spite of mediocre performance. Furthermore, the bank is committed to meeting its costs and loses flexibility to adapt to adverse market conditions.

A batch of measures on bonuses in UK banks has been announced:

  • CEOs declining bonus payments. This may appease the public but potentially undermines the worth of the CEO.
  • Percentage of bonus paid in stocks not cash. This may be reassuring for the shareholders but what about price manipulation that could be introduced by bankers looking to artificially boost their bonuses?
  • Deferred bonuses over the long-term. This is one of the measures already widely implemented in the City: while this is effective to retain staff, it also means less flexibility overall.
  • Bonuses subject to claw-back clauses. At first glance, this does sound like a good idea. However, we have no guarantee on both how it would be implemented and responsibility defined. Managers could spend countless hours trying to assess their staff rather than focus on the business itself.

… And so have governments

George Osborne had already implemented a number of measures including a vote of shareholders to approve the remuneration of the top management. Now, the Chancellor is considering implementing a clear segregation of activities between retail banking (deemed less risky) and investment banking, thus putting an end to the concept of “universal banking”. This ring-fencing would protect retail banks’ activities should investment banks run into trouble. It is a type of measure that cannot be implemented overnight. This would probably take years.

The EU is, predictably, more interventionist. The Europeans are looking to simply limit the amount of bonus paid to CEOs to once or twice their annual salary. No doubt, salaries of CEOs will be driven up or the shareholders will be left with less ambitious bosses. This type of strategy is particularly relevant to the City due to its EU-wide implementation.

The future of the banking industry in the City

The financial sector accounts for a sizeable chunk of the UK’s economy. This means that without its banks (and their tax contributions), the country could find itself in a very awkward position. In the absence of financial reward, it is evident that talent will be lost as bankers seek to move to more welcoming jurisdictions in Asia or the US. This scenario appears increasingly probable if the EU’s idea were to prevail.

Should we let the City crumble or should we free ourselves from EU constraints in order to remain competitive with other financial centres? This sounds like a no brainer: let’s embrace freedom!

Elizabeth Zeisel – Audit Team

Westbury Accountants and Business Advisors is an accountancy practice based in London. Westbury have been providing Accounting and Tax solutions to small and medium sized businesses since 1936. Talk to the team at Westbury on 0207 253 7272; or visit http://www.westbury.co.uk.