“There has been a massive reduction in the level of bonuses from three or four years ago, down almost by half, down by about £5bn and we want to see that trend continue.”
David Cameron, 6 January 2012
The background
David Cameron fired the latest broadside at the fat cats this week as political concensus that something must be done about excessive salaries in the corporate world grows.
The Prime Minister will set out plans imminently to give shareholders more of a say in curbing enormous payouts for top executives.
The Financial Services Authority, the Bank of England and politicians from across the political spectrum are all putting pressure on boardrooms in the City and beyond to acknowledge public distaste at pay inequality.
But Mr Cameron also mentioned that bonuses have been falling in recent years in the banking sector. Is that a sign that the City is getting its own house in order without the need for outside interference?
The analysis
The Prime Minister’s remarks reflect research done by the Centre for Economics and Business Research (CEBR), which tracks remuneration for around 300,000 financial services workers in London using Office for National Statistics data.
The consultancy says bonuses hit an all-time high of £11.5bn in 2007/08, while in the last financial year, payouts totalled £6.7bn.
That is indeed “down by about £5bn”, as Mr Cameron said, and CEBR expects bonuses to fall again to £4.1bn by the end of the current financial year.
Put the violin away though, because research also suggests that basic pay has risen as bonuses have fallen.
Last year CEBR found that bonus payments in the city had fallen by 8 per cent since the year before – but average regular salaries rose by 7 per cent in the same period.
Other research backed that trend. Recruitment firm Astbury Marsden found that pay for the average City worker went up by 12 per cent on average in 2010/11 and managing directors were awarded a 21 per cent increase.
And it’s far from tough at the top. Total earnings for directors of FTSE 100 companies went up by an average of nearly 50 per cent to hit £2.7m in 2010, according to Incomes Data Services.
Needless to say, increases of this order of magnitude far outstrip UK growth during the same period, as well as pay inflation and most indicators of corporate performance.
So despite the fact that bonuses have fallen and are predicted to stay low, Mr Cameron is right that the City appears to be failing to exercise pay restraint across the board.
It may be politically irrestible, but does it make good economic sense to force pay restraint on the leading City firms?
In what may be a fine example of the law of unintended consequences, CEBR also points out that the taxman is one of the biggest losers as bonuses shrink.
The Treasury skims about 60 per cent off the top of the bonus pots, so the dramatic fall in bonuses means the state has lost out too.
In 2007/08, the Government collected £6.8bn from the £11.5bn paid out to City workers. In 2011/12, the windfall is expected to be just £2.5bn.
Then there are the fears that banking hotshots will leave London for rival financial services centres if pay packages shrink too much, hurting the British economy.
A difficult risk to quantify, although when the Association of British Insurers called on banks to “fundamentally restructure their remuneration practices” last month, the shareholders’ group pointed out that few banks are recruiting and most are laying people off at the moment, so staff are less likely to be looking elsewhere.
CEBR predictions add fuel to that, suggesting as they do that around 27,000 jobs in London’s financial services sector were lost in 2011 and recruitment levels are likely to stay at that level for most of this year.
When recruitment consultants Morgan McKinley surveyed 560 people last summer, they found no evidence of an exodus to Singapore or Frankfurt on the cards, concluding: “The majority of financial services professionals in London are not currently planning to relocate.”
The verdict
The details of the Coalition’s plans to rein in excessive remuneration will emerge in the coming days.
Whatever the details, there’s compelling evidence that the financial services industry is failing to regulate itself, and from the government’s point of view, now may indeed be the time to act.
By Patrick Worrall
