Bonuses cut in SA banks but salaries will rise

South Africa's financial sector has been sheltered from the worst of the financial crisis, but the recession has hit results and bonuses. This week Absa, the first of the country's "big four" banks to report results, has announced "substantial cuts" in the bonuses of executives and directors after a 36% fall in net income last year.

"The cash bonus pools are down by 50% and the total variable pay component will be down year-on-year, and with a significant portion of senior managerial and executive variable pay taking the form of deferred awards over a three year period,- said Nadine Drutman, acting head of Human Resources at Absa. - Given where the earnings are, we don't think it is appropriate to go with huge cash bonuses."

Banking analysts are optimistic about prospects for the sector, but chief executive Maria Ramos warned the year ahead "is not going to be a walk in the park". Absa Directors and executives will receive 35% of their pay in cash and the balance will be deferred over three years. Ms Ramos is leading by example and has agreed to have all of her (unspecified) bonus paid over three years.

"One trend we are seeing is the use of restricted shares in three years' time, a system which is orientated towards retention rather than performance, a sort of golden handcuffs to hold on to the best talent," says Nick Icely, executive compensation expert at Deloitte SA. "But in general there will be no dramatic adjustment, as there has been a great sense of responsibility in the banking environment."

On bonuses Absa may have taken its cue from its British parent company Barclays Bank, but the other SA banks are expected to follow suit. On Thursday, Nedbank announced a 25% fall in profit for 2009 and said executive bonuses would be "conservative". Standard Bank, which will announce its results next week, has already warned it expects a 20 to 25% drop in earnings.

Aside from peer pressure, banks also need to be in line with King III, South Africa's revised code of corporate governance which will come into force in March. The code focuses on executive remuneration and states, among other things, that bonuses must be subject to the performance of the group. A detailed remuneration report should also be disclosed, which will inevitably be subject to public and shareholders' scrutiny.

"Governance in banking has always been good in South Africa, and the link between retribution and performance has been the norm for many years, so there's been nowhere near the emotional response of the UK or US," says Chris Blair, Ceo of 21st Century Business and Pay Solutions, a remuneration consultancy in Johannesburg. "The spotlight is on executive pay, and this year as the economy recovers we expect salary increases across the board."