Q and A: the truth about bank bonuses

What has been announced?

The Government has been stung by criticism that the country is being hit by £81bn of cuts and tax rises, while bankers hang on to their bonuses.

Yesterday, it was confirmed that the levy on the banks will be made permanent and contribute an extra £800m to Treasury coffers this year.

Today, the Chancellor announced that bonuses paid by Britain’s biggest banks – RBS and Lloyds, which are part-nationalised, and Barclays and HSBC – will be lower this year than in 2010.

RBS and Lloyds have agreed to limit how much of these bonuses will be available in cash. Anything more than £2,000 will have to be paid in shares. The rationale is that this will encourage responsibility.

For the first time, the banks will have to seek approval from their remuneration committees for the pay of their ten highest paid employees in each business unit.

From this year onwards, as well as revealing the pay of board members, they will disclose how much their five highest paid non-board members receive.

This means the salary details of at least seven executives at each bank will be published.

From 2012, Britain’s biggest banks may have to publish the pay of their board members and the eight highest paid executives below board level.

According to Business Secretary Vince Cable, this “will give the UK the most transparent financial regime in the world”.

So are the banks behaving then?

The banks, whose risky lending practices are blamed by many for the straitened economic times we’re all having to adapt to, know they have to be seen to be sharing the pain.

They have agreed to limit their bonus pots, and have accepted more transparency in what their top earners are taking home.

But total bonus payments are still expected to amount to more than £6bn this year, with HSBC’s Stuart Gulliver in line for up to £10m, Barclays’ Bob Diamond £9.5m, RBS’ Stephen Hester £2m in shares and Lloyds’ Eric Daniels £1.45m in shares.

Where does Labour stand?

The Shadow Chancellor Ed Balls is enjoying baiting the Coalition Government, but Labour is accused in turn of presiding over a light-touch regulatory regime that almost led to the collapse of the banking system.

The Labour government introduced a one-off bonus tax last year, which raised £2.3bn net. The Coalition Government’s permanent levy will raise £2.5bn this year and £10bn over a full parliament.

What’s the situation in the US?

There is a bank levy in place in the US, and in 2009, President Obama announced limits on pay for executives working for companies requesting bailouts from the taxpayer.

He also toughened the rules on disclosure, with firms expected to reveal “all the perks and luxuries bestowed upon senior executives, and provide an explanation to taxpayers and to shareholders as to why these expenses are justified”.

But bonuses have survived intact – because bonus pay often makes up as much as 80 per cent of an investment banker’s total remuneration. This is a higher percentage than in Europe, where basic pay plays a bigger part.

Last month, JP Morgan announced a trebling of pay and bonuses to more than £1.1bn in the last three months of 2010 – even though bank revenues had fallen. Over the full year, the bank paid £17.7bn in pay and bonuses.

But change is in the air. The US regulator, the Federal Deposit Insurance Corporation, is proposing the first shake-up of pay structures since the financial crisis.

It wants executives at big financial institutions, such as Bank of America, JP Morgan and Goldman Sachs, to have half of their bonuses deferred for at least three years. After then, payments would be made over three years, rather than in one fell swoop.

If this comes to pass, the situation in the US would still be softer than in the European Union, whose guidelines say top bankers should receive no more than 20 per cent of their annual bonuses in cash.

Goldman Sachs revealed last month that chief executive Lloyd Blankfein’s salary had tripled and he would receive £8m of shares. This was despite a fall in the bank’s net income.

Citigroup’s Vikram Pandit has been awarded a basic salary of more than £1m. In 2009, he said he would only receive a dollar until Citigroup returned to sustained profitability.

Will the Government’s policies work?

Chris Roebuck, who has worked for several international banks and is an honorary visiting professor at Cass Business School in London, accepts that the Government has introduced a transparent system for monitoring executive pay.

While he agrees that ministers are under pressure from public opinion to “bash the bankers”, he does not believe that the publication of senior executives’ salaries would have prevented the financial crisis. This is because we are not learning “who is a risk taker and who isn’t a risk taker”.

Prof Roebuck said: “Before the financial crisis, 95 per cent of people in investment banks were going about their business with integrity and professionalism, not knowing a small number of their colleagues were creating financial instruments that would destroy the system.”

He added that the only way to avoid a future crisis was to ensure that banks kept aside a pot of money that could only be used if there were problems.

Restricting bonuses in Britain could only achieve so much. After all, with JP Morgan employing 8,000 investment bankers in London, what was to stop people from RBS and other British institutions simply jumping ship?