Five reasons why your bonus might be smaller this year
Since the FSA's decidedly watered-down proposals on remuneration, theories over what to do with banker's bonuses have been materialising quicker than Usain Bolt's propensity to smash world records. Here are five to emerge:
1. Ban guarantees
As the recent cases at RBS and BarCap illustrate, guaranteed bonuses or 'golden hellos' are increasingly being offering to incentivize bankers to jump ship.
The Association of British Insurers would like to see an end to guarantees via a worthy, but logistically difficult, proposal which means banks alter contracts so that employees don't forfeit deferred bonuses should they leave. Instead they get transferred into an escrow account to be collected several years later, provided their work for the old firm hasn't blown up.
The theory is this reduces the need to buyout old contracts and means bonuses are still linked to longer term performance, and by proxy better risk management. Investment bankers argue it will lead to endless squabbles over contracts and clawbacks though.
2. The High Pay Commission
Left wing pressure group Compass believes a 'high pay commission' should be established to introduce a 'wide-ranging review' of pay and bonus awards and curb excessive remuneration.
Essentially, this is a cap on big bonuses, in the same way the Low Pay Commission looks to ensure the minimum wage isn't totally unreasonable. It has the backing of a number of journalists, academics and politicians including (of course) Vince Cable who says there's "no justification" for big payouts within financial institutions.
Alistair Darling has already dismissed this possibility, in spite of a growing number of supporters for the campaign.
3. Bigger base salaries
UBS has supposedly increased basic pay by 50% to compensate for smaller bonuses, and Bank of America-Merrill Lynch is thought to have done the same. Obviously, this has the rather large disadvantage of being a fixed cost on banks' balance sheets, but this practice could still pick up pace.
"It has been acknowledged that a move away from a bonus culture would need to lead to higher salaries, but what may not have been anticipated is the anecdotal doubling of salaries in some areas - in effect giving a guaranteed bonus," Nicholas Stretch, a lawyer who specializes in employee incentives at CMS Cameron McKenna told Bloomberg.
4. Coordinated legislation
In spite of talking tough earlier in the week, Alistair Darling is unlikely to stick his neck out and regulate banks in the UK ahead of other financial centres.
But, he will ensure the issue is tackled at the G20 summit of finance ministers in September: "Banks need to be responsible about pay and bonuses. One of the things concerning me is that when you tackle banks about this, they say that if you do something here, the Americans, the Swiss or the French will poach our people," he said.
5. Political pressure
Even if a formal law isn't passed, gathering public backlash against bonuses and political tub-thumping may prompt banks to curb bonuses themselves.
Previously, Goldman Sachs shrugged off negative press about its big bonuses, but analysts at Pali Capital suggest it could crack and accrue a smaller pot in the second half.
Goldman was the first to admit it bonuses might be very sizable in 2009, making it slightly less shocking when other firms followed suit, so if it swings the other way pressure might increase on its contemporaries to do the same.
What do you think? Are any of these changes feasible, or possibly even desirable? What alternatives are there?
