EDITOR'S TAKE: Bonuses RIP
If 2009 bonuses match expectations when they're paid out in early 2010, it will be surprising. It will be even more surprising if 2011 bonuses bear any resemblance to the bonuses that have gone before.
In the past nine and a half months, most banks have done handsomely out of wide spreads, low interest rates and rising equity markets. In normal circumstances, pay would be commensurately high. In this market, that seems unlikely.
Cash bonuses in 2009 will be changed beyond recognition by longer deferrals, clawbacks, and a higher ratio of salaries to performance pay.
But more importantly, future compensation will be impacted by the tougher capital rules and leverage constraints favoured by the US, which seem a likely outcome of this week's G20 meeting.
As RBS's rights issue issues go to show, private investors aren't keen on recapitalizing banks. The risks simply don't match the returns.
Analysts at JP Morgan predict investment banks' ROE will decline to around 11% in 2011 following changes to OTC derivatives markets and more widespread use of measures such as stressed VaR to calculate risk.
As both JPMorgan and The Telegraph's Jeremy Warner point out, banks will therefore need to increase returns substantially, if they're forced to raise capital from private investors in the current market.
Bonuses will be directly in the firing line. Barclays' Marcus Agius said last week that banks don't pay large rewards out of choice, but obligation: organisations which don't pay risk losing staff to those that do. It would take a market-wide external shock to change this pay paradigm. The G20 may be about to deliver it.
