The Big Question: Should banks compensate for the super tax on bonuses?

Should banks compensate for the super tax on bonuses?

We ask the experts for their answers… have your say online at the Employee Benefits forum

Angela Knight, chief executive of the British Bankers Association:

A lot has changed in banking in the past two years, but the reform the public really demands is on bonuses.

The banks are working to change their practices, but the clamour is for immediate action.

Major steps have already been made to align pay better with company performance – and to shrink the biggest bonuses. Last August, the banks signed up to a new regulatory code of conduct on pay practices; in September, they signed up to the new G20 principles; and in December, the Chancellor announced a one-off payroll tax on banks that award large bonuses.The banks have agreed to all of these and are working to implement the changes in a way that will not result in damage to one of the UK’s biggest industries.

No bank is yet prepared to rein back performance bonuses dramatically, because this would simply mean exposing itself to the risk of predatory competitors picking off its best staff.

And since finance is a cross-border industry, pay restrictions imposed in one country could simply lead to businesses relocating elsewhere. It is not so much the fear of talented individuals upping sticks to Switzerland that is worrying the banks – this happens all the time, to some extent – it is the fear that the cumulative changes made to banking regulation and taxation are making the UK a more hostile place for these businesses to locate.

The UK banks are listening, they understand the public anger and they are changing. But they believe global change is needed if we want to remain the world’s financial centre, with all the jobs and revenue it brings.

Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development:

Employers in the financial services sector can only respond to the one-off 50% tax on bonuses of more than £25,000 in two ways: either the banks take the full brunt of the tax hit for staff, or they can protect their
profitability by reducing their bonus pool, thus passing on the tax to the bankers themselves.

The first option is likely to be popular with employees, but it is likely to upset shareholders, whose primary concern is the profitability and financial stability of the business. In addition, banks that over-compensate for the super tax and shell out ludicrous bonuses are in danger of further inflaming public suspicion and anger.

On the other hand, banks that respond to Alistair Darling’s tax measure, designed to be paid by the employer, not the employee, and cut discretionary bonuses could damage staff engagement. For example, some bankers may
feel they are being unfairly lumbered with a penalty that should be borne by the institution as a whole, not specific groups of employees, especially if they work in areas that did not cause the crash. Banks that make radical cuts to bonuses risk disgruntling staff if they fail to explain their actions effectively.

However, employers in the sector should remember the super tax is only a temporary measure, so I do not think it would be wise for them to radically change their remuneration policies on the back of this one-off tax.

I cannot see UK bankers upping sticks and leaving because of this tax alone, but I do foresee employers in the sector having more difficulty retaining senior staff because of longer-term measures, such as the income tax rate increases for higher earners.

Jane Vivier, reward and recognition manager at Cancer Research UK:

Reward and performance are inextricably linked, and if an individual has been told what to expect and the performance required to get it, it may follow that some employers are making the gesture of paying the tax on their behalf.

One positive that may emerge from the recent discussions around pay and reward in the media is companies reassessing and, where necessary, modernising their reward packages to suit their individual needs and aims. What many outside the ‘reward sphere’ often do not recognise is that there is a whole host of factors that come into play when designing reward strategies. There is far more to the piece than just money.

Reward decisions have to be made to suit the business they concern and the individuals involved. The move towards performance-related pay is definitely a step in the right direction. As long as the contribution made is appropriate and measured against a robust set of criteria, then employers should retain control over their own reward policies. Perhaps, rather than the continuous discussion around levels of reward, we should shift towards a different view of the reward package. For example, the good that can come from all sections of the population in volunteering, charitable giving, green initiatives and sponsorship of charities large and small.

Many projects are tax efficient and can provide benefits to people while ‘giving something back’.