British banks are braced for the most contentious bonus season since the start of the financial crisis as shareholders ratchet up pressure on pay and regulators push for a radical overhaul of how lenders measure the performance of their most senior staff.
The Association of British Insurers, which speaks for about one-sixth of UK investors, on Monday sent a letter to all five leading banks, Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered , demanding “fundamental” changes to the way they pay staff.
“It can no longer be business as usual,” said an ABI spokesman. “We expect to see significantly lower bonus pools and awards given to individuals.”
Senior bankers have so far successfully deflected calls for a root-and-branch overhaul of their pay structures, even as the scale of the regulatory challenges facing the industry mounts and stagnant growth in developed markets takes a big toll on profits.
City bonuses are expected to fall to 4.2 billion pounds this year, their lowest level since 2002, according to forecasts from the Centre for Economics and Business Research, following a relatively dismal year for the sector. Globally, investment banking revenues in 2011 are expected to be down as much as 15 to 20 percent year-on-year, with some core business areas, such as fixed income, registering far steeper falls amid volatile markets and shaky corporate and consumer confidence.
So far this year, Barclays, HSBC and RBS have set aside a total of about 8 billion pounds for staff pay and bonuses within their investment banking divisions, according to estimates compiled by the Financial Times. That represents a drop of 6 percent compared with the first nine months of 2010, where they accrued about 8.5 billion pounds over the first three quarters.
Revenues, however, are down about 13 percent over the same period, prompting some leading investors to complain that banks have yet to adjust their pay structures to a much less profitable future.
Like their US and continental European rivals, banks’ so-called “compensation ratios”, the proportion of income set aside to pay staff, have crept back upwards in 2011. At RBS, for example, the bank’s global banking and markets division earmarked 40 percent of revenue for pay and bonuses over the first nine months of the year, and nearly 50 percent in what was a woeful third quarter.
The ABI claims banks have failed to respond to its calls for pay moderation, even as shareholder returns have plummeted. With banks under pressure to retain earnings to bolster capital, investors are urging banks to share more of the pain with their employees, in the form of lower bonuses, as opposed to simply slashing dividends.
With more than 100,000 job cuts announced across the sector, worldwide, in recent months, and tens of thousands more expected in the new year, banks can no longer plausibly claim that they will lose staff if they cut bonuses, pay specialists told the FT.
“It’s no secret that the uncertain economic outlook combined with increased capital requirements is causing banks fundamentally to rethink their business models,” said Tom Gosling, a partner at PwC in London. “Whereas last year the focus was on retaining employees for the expected economic recovery, this year has much more of a feel of a reset in compensation levels.”
Whether banks will be able to resist more sweeping changes to the way they reward their top executives also looks increasingly uncertain. The Bank of England’s Financial Policy Committee, for example, is examining whether banks’ focus on return on equity, a key measure of profitability, should be discarded in favour of a return on assets measure that would have seen far lower levels of bonus pay-outs in recent years.
Nick Clegg, the deputy prime minister, announced on Sunday that the government would bring forward plans to tackle executive pay. And David Cameron has said he would consider a bonus pot of 500 million pounds at RBS this year to be unacceptable, in spite of that figure being just half of what was paid out in 2010.
The prime minister knows that his mantra that “we are all in this together” will be severely tested by bankers receiving hundreds of millions of pounds in bonuses, given the imposition of tight pay restraint on public sector workers until the end of this parliament.