British Bonus Season Set to Disappoint Traders
Staff Writer, CNBC.com
British traders and executives are facing a disappointing bonus season – just as politicians are putting renewed pressure on the bonus culture and executive pay.
UK City bonuses for 2011 will drop by 37 percent to 4.2 billion pounds ($6.4 billion), according to the Centre for Economic & Business Research (CEBR). Profits are down across the board after the euro zone debt crisis defied most traders' expectations last year.
Former big payers such as Barclays have already announced bonuses will be cut. Barclays CEO Bob Diamond, once the best-paid banker in the City, said late last year that “pay and bonuses will be much lower this year”. Analysts at Citi estimate Barclays Capital, the bank’s investment unit, which is known as one of the City’s biggest bonus payers, will slash its bonus pool by around 17 percent.
Diamond’s counterpart at Lloyds , Antonio Horta-Osario, has already announced that he will forgo his $3.7 million bonus.
Those working for American banks are also facing reduced remuneration. Investment bank Morgan Stanley is capping cash payouts at $125,000 for now, according to a report in the Wall Street Journal, while Goldman Sachs is set to halve 2011 bonus pay for its partners.
This can mean that they are being rewarded in other ways.
"There is a bit of a shift from the bonus structure to regular pay. There are also 27,000 fewer jobs in the City over 2011 as a whole, so there are fewer bankers and traders to get bonuses," Rob Harbron, economist at CEBR, told CNBC.
This may be in part an effort to fend off criticism from policymakers as well as a reflection of lower profits in 2011.
The country’s right-wing Prime Minister David Cameron fired a warning shot across the bows of the banks earlier this year when he said shareholders should be able to have a vote on top pay packages.
And there has already been controversy over the award of a $6.1 million bonus to the head of Royal Bank of Scotland’s embattled investment bank – although this is part of a long-term incentive scheme.
There have been months of protests by the Occupy movement in the City district to remind City workers that they are not always popular with the rest of the country.
“What really sticks in people’s throats is when executives get paid off or rewarded for failure,” James Barty, Senior Advisor on Financial Policy, Policy Exchange, told CNBC.com.
“Shareholders don’t mind rewarding those who have benefited the company.”
Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland (RBS), who left the bank with a hefty pension despite spearheading its disastrous purchase of ABN Amro, is often cited as an example of excessive pay – particularly since the British taxpayer is now RBS’s biggest shareholder.
Barty believes that a substantial proportion of pay should be kept in an escrow account and paid out according to the company’s long-term performance.
“This would change the balance of power and encourage shareholders to stand up to chief executives,” he said.
There are plenty of industries in London boosted by bonuses - including luxury property, high-end cars and plastic surgery. Members of these industries are nervously awaiting the outcome of the bonus season.
"There's also the threat of future legislation and the possible threat of more tax and the Financial Transactions Tax. That's acting as a threat to London as a financial centre, compared to markets like Hong Kong and Singapore," Harbron said.