City grandee Sir David Walker will recommend banning banks from paying guaranteed bonuses to staff when he publishes his final review into corporate governance at the end of next month.
Sir David has decided to clamp down on bankers' pay because of a growing acceptance that huge salaries and bonuses may have exacerbated and contributed to the banking crisis. It is not clear whether he will propose banning one-year guaranteed bonuses – often known as "golden handshakes" as well as the multi-year payments.
"It is quite extraordinary but the banks have been quiescent about plans to cut bonuses, and improving the way risk is priced," said one source. "Everyone knows that the levels of bonuses are quite insane. None of the banks dare break ranks and stop paying such big bonuses because they are frightened traders will just jump ship to another bank, or overseas. That's why many actually want to be told what to do."
Sir David has received a flurry of submissions from the industry, most of which have argued for bank boards to take a much tougher line on how bankers' pay is structured because, they argue, the big pay awards may have pushed traders – particularly in proprietary trading – to take bigger risks than they should. Many of the complaints he received from the City's interested parties, including many non-executive directors on bank boards, were that they felt powerless to stop banks paying out such big bonuses.
The Government appointed Sir David to investigate how corporate governance could be improved after the rescue of the financial system. Sources close to him said: "Sir David has definitely hardened his view, partly because of the criticisms he has received."
Sir David's proposals will be welcomed following the latest public outcry over the high-level bonuses being paid at some banks, such as Goldman Sachs, and the action being taken by Barack Obama to cap pay for top executives at banks which were rescued by the US government.
Lord Turner, the head of the Financial Services Authority, also announced fresh plans to crack down on pay last week when he said that banks which have earned excessive profits will have to pump much of the cash into building up capital, rather than paying out bonuses. The FSA wants banks to raise capital ratios ahead of new rules from the Basel Committee on Banking Supervision, out next year, which will impose draconian ratios across the industry.
Sir David, due to publish his report on 26 November, will also make recommendations which help strengthen the power of investors.