Return of the bonus

The Chancellor wants bankers to 'get real' over bonuses, but are payouts in the City getting out of hand again, or are executives like Stephen Hester just easy targets? Nick Clark reports

Alistair Darling is unhappy. The spectre of City bonuses – a particular government bugbear – is back in the headlines, and the Chancellor fears that the banks are resurrecting the culture that undermined the global economy in the run-up to the crash.

Mr Darling told The Independent this week that some bankers were "complacent", and that those who looked like they were returning to excessive risk-taking would "need to be brought back to earth".

This comes after fury from the trade unions over the size of the incentive package offered to Stephen Hester, the banker charged with turning Royal Bank of Scotland around, as well as talk that some of the Wall Street banks are set to pay out record bonuses this year.

In response to the Chancellor's comments, his Tory counterpart, George Osborne, yesterday said he had warned that "another unacceptable round of big bonuses were on their way. The banks should watch out they don't misuse taxpayer support – it's there to support lending in the economy, not mega-pay deals".

The culture of bonuses has long been a political football, but was named as one of the principal reasons behind the collapse of the world markets. Banks were blamed for incentivising short-term risk-taking, and encouraging tactics that made their institutions inherently unstable.

As bankers became public enemy number one and the Government was forced to step in to bail them out, their remuneration packages came under intense scrutiny. Executives at banks including Barclays, HSBC, and Lloyds as well as most of Wall Street renounced their bonuses for last year.

But now the issue has returned, and is important enough for the Chancellor to take a keen interest.

One investment banking source said yesterday that bonuses were likely to be up this year for two reasons: the firms have seen business rocket, and the hiring merry-go-round has restarted. The source added: "We are only at the halfway stage. If the market collapses, like in the last quarter of 2008, the bonuses will go with it."

Banks are offering bonuses to keep their best staff in place and hire rivals. "They want the best people, and this is how you get them," one banker said. Investment banking activity, rather than retail banks like RBS, has picked up in the first half of the year. While mergers and acquisitions activity has remained weak, the market has been flooded with rights issues and companies looking to restructure debt or raise equity in the market.

Rights issues, such as that completed by the mining giant Rio Tinto this week, generate fees of 2 per cent to 4 per cent for investment banking advisers. This year, companies in Europe have raised $123bn (£75bn) through rights issues, up from $84bn last year, the data provider Dealogic says. At the same time, equity capital market activity totalled $172bn, up from $143bn. Banks' trading floors have also seen solid returns from foreign exchange and commodities trading.

The Government has signalled that it is keen to stamp out the bonus culture, with the Prime Minister last year saying: "The days of the big bonuses are over." Banks have reacted, and many have increased employees' basic salaries to get around the thorny bonus issues. "If you ban bonuses, the way to retain staff is with a higher salary," a banker said, adding: "Raising the base salary is crazy; it's like a guaranteed bonus, even if there's underperformance." In the US, Morgan Stanley doubled the salary of its chief financial officer and co-presidents, while others, including Citi and UBS, have looked at it.

The Government is still steering clear of introducing official bonus caps, but a White Paper published next week is set to hand increased powers to the Bank of England and the UK's Financial Services Authority to prevent excessive risk-taking in the financial markets. Colin Melvin, chief executive of Hermes Equity Ownership Services, a group that represents shareholdings worth £50bn, has called for a "paradigm shift in the way the City works".

He said: "We need to usher in a new culture which rewards the creation of sustainable wealth and shuns short-termism in the relationship between shareholders and the companies they own. Further regulation is only part of the solution."

Mr Darling has said of the bankers: "If they go back to the way they were – to business as usual – without asking themselves over and over again whether they understand what they are doing, that would be disastrous for them and the rest of the world."

Banks are looking at ways to link incentive payments to performance, and now talk about Ltips – long-term incentive plans – rather than bonuses.

One banker said: "Firms are going to look increasingly at Ltips. Staff will be paid more often in shares, to link their performance more closely to the interests of the firms."

The bonus culture has returned to the US, in part after curbs were removed. The banks that participated in the US government's Troubled Asset Relief Programme had to scale back bonuses for their top employees, but many have sought to repay the state and restart incentive payments.

One banker said: "All this talk that 'bonuses are back' is rubbish. They never really went away. Bonuses were lower last year but will be back in 2009, if activity stays like this."

In the thick of it: How the row over bonuses reignited

Bonuses aren't paid out to the banking industry until the end of the year, but the issue reignited this month after Royal Bank of Scotland announced details of Stephen Hester's remuneration package. Mr Hester. left, was dubbed "Stevie Wonga" by the red-top newspapers after it emerged that he would take home almost £10m if he can double the bank's share price within three years.

This came as reports of investment banking bonuses emerged. Goldman Sachs has performed strongly this year and staff can expect record bonuses, according to reports. The group's total remuneration pool – including salaries, bonuses and benefits – is worth about $12bn.

Nomura also said in June it was planning to change its traditional-style contracts for performance-related pay.

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

The ZX Spectrum is back

The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

Even the screenwriter pours scorn on Grace of Monaco biopic

The critics had a field day after last year's premiere, but the savaging goes on
Menstrual Hygiene Day: The strange ideas people used to believe about periods

Menstrual Hygiene Day: The strange ideas people once had about periods

If one was missed, vomiting blood was seen as a viable alternative
The best work perks: From free travel cards to making dreams come true (really)

The quirks of work perks

From free travel cards to making dreams come true (really)
Is bridge the latest twee pastime to get hip?

Is bridge becoming hip?

The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
Long author-lists on research papers are threatening the academic work system

The rise of 'hyperauthorship'

Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

The rise of Lego Clubs

How toys are helping children struggling with social interaction to build better relationships
5 best running glasses

On your marks: 5 best running glasses

Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

'Ben Stokes gives everything – he’s rubbing off on us all'

Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

Please save my husband

As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada