February 27, 2011 7:56 pm

Deferred bonuses seen as having less value

Bonuses that will not be paid for several years are significantly less valuable to corporate executives than cash in hand, raising questions as to whether deferring pay actually curbs risk-taking, fresh research suggests.

Since the financial crisis, global regulators have forced banks to overhaul their pay structures, reducing the amount of cash bonuses paid and requiring incentive awards for senior executives to be deferred over several years.

The Financial Services Authority, the City watchdog, has put in place one of the world’s strictest frameworks, which will see top bankers take home as little as 20 per cent of their bonuses in cash, with the remainder paid out over three to five years.

However, a study by PwC, the professional services firm, and the London School of Economics suggests that the longer employees are made to wait for pay, the less it is worth to them.

Asked whether they would prefer a 75 per cent chance of receiving £250,000 immediately, or a 75 per cent chance of receiving £400,000 in three years’ time, more than half the 100 executives surveyed chose the smaller sum.

In fact, deferred pay awards were discounted by an average of more than 20 per cent a year – meaning a £500,000 bonus payable only after five years would be worth next to nothing in the minds of most bankers.

Regulators believe that to reduce reliance on one-off payments based on a single year’s performance will better align risk and tie bankers’ pay to the long-term financial health of their employer.

But the PwC research suggests that increased deferral of pay may not affect behaviour because, in effect, it is immediately written down in value.

“The extent to which executives devalue deferred pay calls into question the effectiveness of bonus deferral,” said Tom Gosling, a remuneration partner at PwC.

“The research shows that it may not have the behavioural impact desired, and may also lead to pressure for higher overall compensation,” he added.

Increased use of deferred bonuses has already pushed up operating costs at banks such as Barclays, which has about 25,000 employees within Barclays Capital,
its investment banking division.

Pay per head at BarCap increased by nearly 20 per cent in 2010, from £191,000 to £229,000, which the bank attributed to a £1bn-plus charge for deferred bonuses that were awarded in 2009, but which it had to account for in 2010.

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