Reflecting on a testy question-and-answer session with a gathering of disgruntled bankers from his company’s underperforming investment banking division, the Barclays chief executive recalled: “The first question was about bonuses. I said that we had to balance market forces with the fact that you have missed your budget by £150m. There was silence.”

The year was 1996 not 2014, and the chief executive was Martin Taylor not Antony Jenkins. But last week’s news that Barclays would be increasing the bonus pot for its investment bankers despite a fall in the division’s profits shows that Mr Jenkins faces the same problem of balancing pay and performance in a competitive industry. How he solves it will have implications for the Barclays group and the City of London as a whole.

The crux is that investment banking is a global industry and pay rates are set in New York. Despite the horrendous losses the industry has racked up in recent years, and the restrictive regulations it now faces, pay has not been decimated. The best traders, advisers, dealmakers and other specialists are still capable of earning seven-figure packages. Provisions to claw back pay in the event of future losses, and payment in shares rather than in cash, have better aligned performance with results but the rewards are still eye-catching.

This is the sea in which Barclays is swimming. It is up to its neck in investment banking as a result of its acquisition of the rump of the collapsed Lehman Brothers business and the expansion of fixed income, currency and commodities trading under the leadership of Bob Diamond, whom Mr Jenkins replaced. If it wants to stay in the business it has to pay competitively; the alternative is to get out.

Why can Barclays not stay in investment banking and just pay its people less?

It is the Wayne Rooney answer. Weekend reports say that the Manchester United football star is negotiating an extended, improved contract even though the team is enduring the worst season for years. His employers could respond to poor results by cutting wages but would then lose their star players, have to pay nearly as much for replacements who are not nearly so good and risk falling into a downward spiral. So it is in investment banking, where the worst of all possible worlds is to have an A-grade cost base and B-grade revenue potential. Thus, while Barclays sticks to its big league investment banking strategy, it has little choice but to pay up.

It really is an all or nothing call. While British banks with more modest investment banking ambitions can address segments of the market, Barclays is so far down the global track that downsizing its investment bank would risk the whole division imploding. Its shareholders, who have the ultimate authority on this matter, will be well aware of this. So management has little choice but to ride out the political storm or sell up. If this matter is not already on the board’s agenda, continued questioning of its bonuses will surely put it there.

The decision management eventually reaches on what to do with its investment bank will be significant for the City as well as for Barclays’ shareholders and staff. The fact that the UK has a leading investment bank in the form of Barclays probably enhances the City’s global status and influence. If the bank retreats from the business the City will be back to where it was in the late 1990s, merely playing host to other countries’ investment banks.

At one level that worked out well. The City prospered for a decade, winning market share and accolades and fuelling the UK economy. But it did so by importing a model flawed by excessive leverage and conflict of interest. By allowing the agenda to be set wholly elsewhere, and by failing to police itself properly, the City degenerated into jungle land.

In future, proper regulation will provide a safeguard against that – but so, too, would having a seat at the table. As we move into a post-crisis reconstruction of the financial services industry, it is vital that different voices are heard on issues such as values and culture. Barclays has the potential to be one such voice. Whether it fulfils that potential or not depends on a crucial decision that its management will surely have to take in the next year or two.

The writer’s books include ‘The Death of Gentlemanly Capitalism’, from which the Martin Taylor quote is taken

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Letter in response to this article:

For financial folly, look at football / From Mr Neal Horwitz

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