Pressure on Britain's beleaguered banks to abandon bonuses for senior executives intensified yesterday asa senior minister declared that the managers at the top of the troubled institutions "shouldn't get a penny".
Tony McNulty, the Employment Minister, issued the starkest warning yet to bank bosses to curb bonuses this year, as the major political parties vied to attack payouts for employees whose banks have been bailed out by the taxpayer.
Mr McNulty said he would not deny bonuses to rank-and-file banking staff, but warned that "anyone having to do with the endorsement of the business model, the future business strategy, shouldn't get a penny. And I think that's absolutely clear".
Stephen Timms, the Financial Secretary to the Treasury, insisted there would be no "rewards for failure". He said: "We have made it very clear for all the banks that have benefited from public support over the last few months that they should not have bonus arrangements that amount to reward for failure.
"There is a reasonable case, for junior staff certainly, that they should be able to receive the reward they were promised but we will have to look very, very carefully at the proposals for bonus payments that Lloyds Banking Group brings forwards."
Government sources made it clear that ministers would take a hard line on high bonus payments at banks that have received taxpayer bailouts, although they stopped short of imposing a cap on payments.
There has been uproar over suggestions that senior bankers would receive bonuses for their work during 2008, a year when the banking system was brought to the edge of collapse.
There was speculation yesterday that the giant merged Lloyds Banking Group, which last week forecast losses of nearly £11bn, was planning to pay out £120m in bonuses to staff, although most staff would receive less than £1,000 each.
Last week, reports suggested that bonuses at RBS could reach £1bn. The Government has an effective veto over bonus payments at Lloyds and RBS, where it has major shareholdings. Both banks have to submit proposals for this year's pay and bonus packages for approval by UK Financial Investments, the Government-owned company set up to monitor taxpayer investments in the banks.
Yesterday, David Cameron entered the row, declaring cash bonuses in the state-backed banks RBS, Lloyds, Northern Rock and Bradford and Bingley should be capped at £2,000, and saying that institutions should refuse to honour contracts calling for large payouts. Mr Cameron told the BBC: "Where the taxpayer owns a large stake in a bank, we are saying that no employee should be paid a bonus of over £2,000.
"People who work hard are seeing billions of pounds of their tax money being paid out and are rightly angry ... Gordon Brown told Parliament that certain conditions would be put in place regarding bonuses in the banks that take taxpayers' money, and it's quite clear that that has not been done.
"Unfortunately the only action the Government has taken is to announce a review into bonuses which will not report until the end of the year," he said. "Because of this dithering we could see bonuses being paid out for a second year to executives in taxpayer-owned banks – which is unacceptable."
Vince Cable, the Liberal Democrat Treasury spokesman, said: "As a general policy position, no bonuses should be paid to banks that have failed and are dependent on the taxpayer.
"There's a longer-term question about how you have a bonus system and how you do create incentives and prevent people taking cash that creates excessive risk. But those big long-term reforms have to be kept separate from today's problems, which are not using taxpayers' money to pay out very large bonuses, for the most part to very highly paid people who have failed as business people."
Union leaders insisted that rank-and-file staff should not lose out because of the crisis at Lloyds. Wendy Dunsmore, national officer of the Unite union, said: "Staff at the new Lloyds Banking Group must not be made scapegoats in the debate around pay and bonuses. Front-line workers, many earning as little as £17,000 a year, are in no way responsible for [Lloyds'] financial difficulties."
A Lloyds spokesman said : "No decisions have been taken about bonus outcomes, and they will not be for some time."
Yesterday Lord Turner, chairman of the Financial Services Authority, refused to comment on the bonus row. He did reveal, however, that FSA chief executive Hector Sants would not be taking a bonus this year.