Are banks heeding King's bonus call?

The Bank of England governor called for pay restraint while banks improve their capital cushions to cope with the eurozone crisis, but have they taken note?

By the end of September 2011, the big three banks had amassed a bill of around £9bn to pay their investment banking staff. Using figures provided by Barclays, HSBC and bailed-out Royal Bank of Scotland, it can be estimated that the three were expecting to pay £3.9bn, £3.1bn and £2bn respectively on employment costs for the first nine months of the year.

These costs include payroll taxes such as national insurance, and pensions. The banks argue that the actual amount put into the bonus pot cannot be seen by the end of the third quarter (the most recent public data). But the reality is that right now, across the City banks are deciding how to "reward" their staff for 2011 at the same time that Bank of England governor Sir Mervyn King has made clear that banks should restrict bonuses and dividends if they are not generating big enough profits to bolster their capital cushions for yet worse to come from the eurozone crisis.

How does the £9bn total compare with the same time a year ago? Then the number was a little over £10.5bn so it represents a fall of around 15%.

The banks, then, are heeding the governor's call? Hard to tell, as the final quarter will be the one to watch – but by the end of September investment banking profits were down 20% at Barclays Capital and down 40% at RBS on the same time last year.

The actual bonus pot numbers are not immediately clear. But at Barclays, at the nine month stage, the potential spoils were thought to be £2bn, down 10% on the same time a year ago. At RBS the chief executive, Stephen Hester, has made it clear that the bank did not set aside any cash for its bonus pool in the third quarter when profits were sharply lower because of the crisis in the eurozone.

The slowing economy, rising unemployment and demands by the government for a freeze on public sector pay were combining to make this year's bonus round contentious even before the intervention of the governor. The Bank's Financial Policy Committee – the body set up to look for systemic risk – is also preparing to look at the way the performance of top bankers is measured. One influential FPC member – Andy Haldane – has already produced figures showing that bankers' pay at the seven biggest US banks would have risen from $2.8m to $3.4m on average between 1989 and 2007 if it had been based on return on assets (risks) rather than return on equity (shareholders), which had sparked a tenfold rise to $26m on average by 2007.

The attempt by bailed-out Lloyds Banking Group – not included in this analysis as it does not have a large investment bank – to "claw back" bonuses for former chief executive Eric Daniels, and other former and existing directors, might be a sign that banks are heeding the calls for restraint. Lloyds took a £3.2bn provision for payment protection insurance which blew a hole in previously reported profits just weeks after Daniels was handed the £1.45m bonus (albeit deferred until 2013 and in shares).

But Lloyds also faces another dilemma: how to present the recruitment of George Culmer, from insurer RSA, as its new finance director. Culmer has already resigned from RSA so clearly wants the job. But his appointment has still not been confirmed by Lloyds. Among the problems to be solved is his signing-on fee, which could amount to £4.5m or more, to buy him out of existing performance-related schemes.


Jill Treanor

The GuardianTramp

Related Content

Article image
British bank bonus bonanza for bosses
Four CEOs have been among those to have taken sizeable bonuses despite widespread calls for pecuniary restraint

Jill Treanor

09, Feb, 2011 @9:32 PM

Article image
Banks must cut executive pay, warns shareholders group
Association of British Insurers joins clamour against bumper bonuses with stiff letter to five biggest banks

Jill Treanor, City editor

05, Dec, 2011 @10:01 PM

Article image
EU moves to crack down on banks dodging bonus cap

EU commissioner warns of further action against banks paying shares and allowances as UK sets out its case against cap

Jennifer Rankin

08, Sep, 2014 @7:54 AM

Article image
Britain's bank bosses to get millions in share payments in bonus cap dodge
Payments would be on top of bank leaders' basic pay in a move to circumvent EU's limits on bonuses

Jill Treanor

21, Feb, 2014 @8:00 PM

Article image
Banks' response to Project Merlin commitments on lending and bonuses
With the 2011 banks' bonus season now underway, how do the Project Merlin strictures stack up, Jill Treanor reports

Jill Treanor

06, Feb, 2012 @5:40 PM

Article image
UK banks receive first report cards from Banking Standards Board
Assessments sent to Barclays, HSBC, Lloyds, RBS, Santander, Standard Chartered, Nationwide, Metro, Citi and Morgan Stanley

Jill Treanor and Larry Elliott

29, Dec, 2015 @7:00 AM

Article image
Deadline looms for major UK banks to submit ringfencing plans
Bank of England to scrutinise detailed proposals on how each will insulate high street operations from investment banking arms

Jill Treanor

05, Jan, 2015 @7:00 AM

Article image
Bankers' bonus cap architect says EU must sue UK government
MEP calls on European commission to take UK to court for allowing banks to 'blatantly' sidestep EU rules limiting bonuses

Jennifer Rankin and Jill Treanor

04, Mar, 2014 @6:48 PM

Article image
Accountants to devise standards to increase confidence in banks’ capital assessments
ICAEW plans come as banking industry awaits first annual Bank of England health check

Jill Treanor

14, Dec, 2014 @4:28 PM

Article image
'Big four' banks cut 189,000 jobs worldwide in five years
Biggest banks' headcount drops to nine-year low as profits surge sharply and unions say worse is yet to come

Jennifer Rankin

28, May, 2013 @6:43 PM