Bonus ban is price for extra taxpayers' cash

Part-nationalised Lloyds Banking Group and Royal Bank of Scotland have had to agree to tough new rules on staff bonuses to secure the extra billions of Government support being pumped in today.

The two banks will not pay discretionary cash bonuses to any staff earning above £39,000 for 2009. The bonus ban also applies to high-earning investment bankers, who traditionally pick up substantial windfalls each year as part of their remuneration deals.

Lloyds and RBS have also agreed that senior executive board members will defer all 2009 bonuses for three years - including long-term incentives due - "to ensure that their remuneration is better aligned with the long-term performance of their banks", according to the Treasury.

The move came as the Chancellor Alistair Darling, speaking as moves to break up the banks to appease European competition fears were confirmed, insisted the extra cash would provide taxpayers with a better deal.

The pay clampdown comes in line with wider reforms in remuneration across the international banking industry.

A G20 agreement on pay is seeking to stamp out excessive pay practices that have been widely blamed for playing a part in risk-taking that led to the financial crisis.

The international reforms are calling for claw-back clauses and three-year deferrals on up to 60 per cent of bonuses paid to avoid rewards for future failure.

But today's news that discretionary bonuses will be canned takes the pay changes a step further.

RBS has already put aside £1.79 billion in the first half of this year to cover staff expenses, including salaries and bonuses.

The recent rebound in stock markets has led to bumper investment banking hauls so far this year and the sector is estimated to be preparing to fork out a 50 per cent hike in annual windfalls to £6 billion.

RBS, which has a substantial investment banking operation, said today the bonus cap presented the bank with another hurdle, with remuneration key in the banking sector to attracting and retaining top staff.

Stephen Hester, chief executive of RBS, said the ban on bonuses was "one of the additional obstacles that makes our job of recovering money for the taxpayer more difficult... although I completely understand the rationale for it".

Bank pay also came under scrutiny today in a Treasury Select Committee hearing with Sir David Walker, who is compiling a Government-commissioned review on remuneration and practices in the City.

Sir David told MPs that the Government's bonus decision announced today for Lloyds and RBS was "absolutely in the right direction".

Mounting fears that the banking sector was returning to its pre-crisis culture of excessive pay were understandable, he added.

"I'm very sympathetic to the high street concern that some of these (bonuses) are egregiously high," he said.

The recent third quarter reporting season in the US raised worries over bumper banker windfalls, with Goldman Sachs revealing it was setting aside 16.7 billion US dollars (£10.2 billion) for the first nine months of 2009 to cover compensation and benefits - up 46 per cent on a year ago.

But Sir David, who was appointed to lead the review in February, said the problem lies with the structure of compensation, rather than the total level.

His report - released in interim form in July, with a final version due imminently - centres on the need for performance targets which are tough and risk-adjusted, payment deferrals and clawback clauses.

The City grandee dismissed suggestions in the hearing that the recommendations so far had been "underwhelming".

He said his recommendations on corporate governance would also see boards work differently and help avoid some of the risk-taking seen as being responsible for the failure of Northern Rock and mammoth losses at RBS.

"We'll start to see very significant changes in how boards behave", he added.

Meanwhile, Lloyds stressed that, while the Government bonus announcement applied to all high earners, staff earning less than the £39,000 threshold would still be in line for annual cash bonuses of up to £2,000.

The average wage among its 120,000 employees is £25,000, the bank said.