Clash of opinions: a protest against bankers’ bonuses in London
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When Antony Jenkins unveiled an increase in Barclays’ bonus pool by a 10th to £2.4bn this year, the bank’s chief executive unleashed another firestorm of media, political and investor criticism.

The bonus rise stirred feelings as it coincided with a one-third drop in pre-tax profits last year and came after Mr Jenkins started as chief executive in 2012 with a mandate to root out what the bank’s chairman later described as a phase of “excess” in the banking sector.

The episode highlights how pay and bonuses continue to dominate the public agenda, at least in Europe, where politicians, regulators and shareholders are on a mission to rein in what some of them consider to be excessively high pay structures.

They can already claim a measure of success. Despite bonuses at some banks bouncing back this year, investor and regulatory pressure have pushed down the amounts being paid in recent years.

In what some call the biggest change in bankers’ pay in a generation, the wide gap between what investment bankers and other professionals, such as lawyers, doctors and engineers, are paid has been narrowing. FT research last year showed that in 2006, the average pay per head at a sample of nine global investment banks was 9.5 times higher than a cross-sector average taken from the FTSE 100. From that level, it has fallen to a multiple of 5.8 times in 2012.

Yet while the pay premium has become smaller, it is still large enough to compensate for demanding working hours and to make banking an attractive sector for young talent.

Regulation in particular has been a driving factor behind the cutbacks, as have been drastically lower returns in the wake of the financial crisis and investor pressure to increase the share of the spoils they get.

Lawmakers and regulators in recent years have introduced rules that force banks to stagger many bonus payments over at least three years. They have also pushed for bonuses to be paid mostly in deferred shares instead of cash to allow for them to be held back in the case of losses or wrongdoing.

Barclays, for example, defers for three years all its managing directors’ bonuses. Rival Credit Suisse is deferring at least 17.5 per cent of bonuses for lower earners and up to 90 per cent for its top-earning staff. Deutsche Bank caps cash payments at €300,000.

Joseph Leung, founder of executive search group Aubreck Leung, says: “Obviously the cash/equity ratio has changed over the past few years to ensure that bankers’ interests are in line with shareholders’, but we’re not seeing people bolting for the doors. In fact, we’ve seen just the reverse in a few situations, where people are returning to the sell side. The grass isn’t always greener on the other side.”

And the regulatory pressure is far from abating. In the UK, the Prudential Regulation Authority is consulting on what appear to be the world’s toughest rules for clawing back bonuses, demanding back cash and shares up to six years after bankers have received them. The clawback applies if a bank discovers misconduct or material errors or if it suffers from a severe downturn in its financial performance or from a risk management failure.

At the same time, bankers’ pay is under further pressure from an EU cap on bonuses that came into force this year. The rules force banks to reduce bonuses for many of their highest-earning employees to the same level as their salaries or twice the amount with shareholder approval.

The strict rules, which are being challenged by the UK government in the European Court of Justice, are designed to curb the high bonus multiples that European lawmakers say contributed to excessive risk taking in the run-up to the financial crisis. But because banks are compensating their employees for the changes to their bonuses, the new rules have turned out to be contradictory to the current regulatory regime of aligning pay better with an individual’s and bank’s medium-term success.

Banks are already putting the finishing touches to plans to increase base pay for staff affected, decreasing their cost flexibility and ability to reward performance. Most will increase pay by using non-pension­able allowances that will be reviewed each year.

While European bankers at first complained that the globally enforced bonus cap could put them at a competitive disadvantage, it now looks as if the cap might have the opposite effect. Bankers say the higher amount of fixed pay they are offering senior staff as a result of the cap could become a recruitment tool for European banks in New York or Hong Kong.

A bigger threat than regulation is the increasing competition for talent between banks and hedge funds, private equity groups and technology companies, which offer similar pay and in some cases more time off work and perks such as wearing shorts to the office.

And rather than bonus caps or deferral rules, it is a mixture of the new stricter capital regime and a slowdown in revenues that will bring down pay even further, investors and analysts say.

Barclays is a good example. While Mr Jenkins has justified the increase in the bonus pool with the threat that another pay reduction would prompt a “death spiral” at the investment bank, shareholders see a ratio of pay to income in the investment bank that last year increased from 39.6 to 43.2 per cent – well above Mr Jenkins’ mid-thirties target.

With most investment banks’ average return on equity still lagging behind the cost of their shareholders’ capital, bankers say the structural changes in pay will continue.


Letter in response to this article:

Death spiral is a myth to perpetuate high pay / From Mr Robert Pickering

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