Bonuses, which first caused widespread consternation in the wake of the collapse of Lehman Brothers, have come to the forefront of the debate in Europe again in recent months.
Politicians and campaigners are repeating calls for rewards to be slashed and the very system of bonuses itself has been attacked. Bonus pools have been cut across the board after most banks suffered a poor 2011.
In the U.K., luminaries including Labour Party Leader Ed Miliband and Bank of England Governor Mervyn King have attacked bonuses – and even the right-wing, pro-business Prime Minister David Cameron called on state-backed Royal Bank of Scotland to “show restraint” in executive compensation.
“I think there is too much focus on bonuses,” Paul Walsh, chief executive of Diageo, told CNBC. “We need to focus on building the export potential of this market place, and I think by creating jobs a lot of these other issues will go away.”
Bonus-declining is the new black among banking chief executives. RBS’s Stephen Hester, brought in to solve the problems of predecessor Fred Goodwin, Lloyd Banking Group’s Antonio Horta-Osório, who took two months’ leave for exhaustion last year, and UBS’s Carsten Kengeter have already said that they will turn down this year’s bonuses.
After Hester, who appears to be tackling RBS’s many problems, turned down a bonus of nearly 1 million pounds ($1. 58 million) due to widespread criticism, Lord Wolfson, chief executive of Next, said he was "hung out to dry".
Chancellor of the Exchequer George Osborne has warned that an “anti-business culture” would damage Britain, which is in danger of entering recession again this year.
One of the concerns of critics is that bonuses fuel a culture of short-termism rather than long-term success, and encourage employees to take more risks.
The average trader or executive will see his bonus cut this year, whether politicians intervene or not. Bonus pools have been slashed across the board after 2011 went much worse than most expected for the markets.
Credit Suisse has cut the amount set aside for bonuses by 41 percent from last year, UBS’s awards are down 40 percent, and Deutsche Bank’s bonus pool is 17 percent smaller.
Tom Naratil, CFO of UBS, told CNBC: “Bonuses get paid on an individual basis and we think we reward those who perform accordingly.”
This is partly because many listed companies, led by banks, are moving towards different pay models.
“The trend that started about a year ago is that bonuses were going to be deemphasized, so what a lot of the investment banks have done is raise their base salaries quite dramatically. There’s pressure on the fact that the bonuses were not getting justified so the remuneration package has been reconfigured,” Ashok Shah, chief investment officer at London & Capital, told CNBC.
At the same time, many banks are reducing headcount.
Companies are increasingly adopting longer-term "claw-back" schemes, where employees cannot cash in on shares awarded as part of bonuses until three or more years after they are awarded, Gillian Chapman, partner specializing in employee incentives at Linklaters, told CNBC.com.
"If a company is saying: 'We can put this into a box and we reserve the right to take it away whenever we want,’ that could seem unfair," she said. "It's not even just linked to performance - bonuses could then change if the political environment changes."
She warned that the UK risks losing talent to the US, continental Europe and Asia if its laws on employee incentives become uncompetitive.
"New regulations are expected in the next few months. The risk now is that there are high expectations of change," she said.
Reducing the bonus pool can also be legally tricky. German bank Commerzbank is currently defending a case brought by employees, taken on when it bought Dresdner, who argue that the bank should have kept promises to pay out a 400 million euros ($531.6 million) bonus pool for 2008.
“We broke our promise because given the circumstances it was necessary; it was the right thing to do,” Martin Blessing, chief executive of Commerzbank, told a London court in January.