City bonuses have always been the subject of comment, criticism and, for the ordinary person on the street, outright incredulity. The past 12 months have seen expressions such as credit crunch, toxic loan and bailout enter everyday language. Never before have the actions of bankers in America and Europe had such a dramatic effect on all our lives. Given the billions of pounds worth of toxic loans and the bailout arrangements quite rightly being put in place across Europe and America to prop up the banking industry, it is hardly surprising that this has prompted the question: what effect will this have on City bonuses?
Remuneration committees should beware. Addressing the Trades Union Congress in September, chancellor Alistair Darling said: “Excessive bonuses which encourage traders to take excessive risks were one of the major reasons for the global credit crunch.”
Lord Turner, chairman of the Financial Services Authority (FSA), has indicated that it will be asking [firms] to explain their bonus structures and warned that if these encourage risk-taking they will be asked to hold more capital to compensate.
Despite all this, big bonuses will be paid. This is because reward in the financial services industry has, for a long time, been subject to systemic problems. Firstly, many bonus schemes use relative measures which can generate a bonus for poor performance when competitors have fared even worse. Other issues include the fact bonus plans do not have enough deferral built in and clawback for losses in subsequent years is virtually unheard of, while a link to risk also fails to feature in most schemes. In times of crisis, employers look to recruit and retain star talent to rescue them, so guaranteed bonuses and buyout arrangements become the norm. Finally, remuneration committees can come under pressure to exercise discretion when market conditions deteriorate beyond expectations, but are seldom asked to increase targets in benign conditions.
Mark Thompson, director-general of the BBC, is regularly said to refuse to accept his bonus. He surely knows how contentious bonuses are in a business largely funded by the public. Why not join me in reviewing the finance industry’s remuneration reports when they are published next year to see who follows his lead?
Paul Bissell, director, Strategic Reward Solutions