The bonus pact has failed, bonus tax fears are back, salaries will rise again

13 December 2010

3 minute read

The bonus pact has failed, bonus tax fears are back, salaries will rise again

BarCap bankers can breathe a sigh of tremendous relief: the bonus pact has come to absolutely nothing.

According to the Telegraph, 'Project Merlin' has fizzled away without an agreement to voluntarily restrict bonuses after all.

Under the pact, Barclays. HSBC and RBS had been expected reduce their bonus pools vs. 2009 and to commit to lending 180bn each year to British companies and 1.5bn to the 'Big Society Bank'. It had also been suggested that the overall 2010 bonus pool in London would be cut from 7bn to 4bn (although this seemed unlikely given that US banks weren't participating).

In return, banks had apparently been seeking assurance from ministers that they would be no longer be demonised and subject to such 'demoralising language.'

So now what?

On one hand, banks are now free to pay whatever they feel like. On the other hand, the failure of the pact raises the threat of another bonus tax. George Osborne is resisting it, but the Liberal Democrats want a tax. Lib Dem Treasury spokesman Lord Oakeshott argued in the Sunday Times that the coalition promise to tackle 'unacceptable City bonuses' had come to nothing and that the issue was being kicked into the long grass.

With bonuses an emotive word, the biggest likelihood is simply that salaries will soon rise again. Last week's CEBS bonus rules make this all the more likely.

CEBS and salary increases

The CEBS rules can be expected to force salaries higher because they deny the right to buyback staff who are thinking of leaving with bonus guarantees.

With traditional buybacks outlawed, the only option will be to retain wavering staff with salary increases. The Guardian reports today that Santander has been forced to do this already. Higher salaries for some are likely to suffuse the system, leading to salary inflation for all.

The CEBS rules also state that individuals must be able to live on their base salaries alone. There are already signs that this is going to be an issue for senior bankers.

UBS MDs have had their salaries increased to 300k, but are still said to be struggling to meet their spending commitments.

The Sunday Times cited a skint senior banker who explained the dilemma:

"That 500,000 bonus is now more like 50,000 in cash terms - probably less [Under CEBS]. You've already bought a big house on an incredibly large mortgage and it's probably gone down in value, so you can't afford to sell it. You have to start thinking about taking the kids out of their incredibly expensive schools.

With the cash component of 1m+ bonuses now restricted to 200k and 50% of that disappearing as tax, banks will be forced to increase salaries again soon simply to adhere to the CEBS rules. Either that, or bankers are going to have to start spending a lot less.

AUTHORSarah Butcher

Global Editor

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derivtrader2
13 December 2010
DerivTrader's suggestions are problematic simply because trading PnL cannot be effectively justified against the bank's facilities (balance sheet, credit lines, customer flows, etc.). Not all trading is created equally and not all bank traders are superstars on their own abilities. I wouldn't pay a flow trader on 6bps or 100bps average bid-offer markets the same; nor the same % as a prop trader, but then again who knows if the prop trader's balance sheet costing has been factored incorrectly and he's really running credit arbs all day on cheap liquidity? It's ridiculous that this should even be brought up when we know credit traders worldwide did upfront PnL accounting for random 7 year CDS deals (clearly flouting even MA principles) and got huge bonuses. the % system is not new - in fact it's failed before. it's just not sound until banks figure out how they risk adjust PnL generation.
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DerivTrader
13 December 2010
I do not think so as a commission cannot be treated differently if you sell a car or if you sell a financial instrument. As long as it is contractual commissions are commissions. Otherwise would be discriminatory... and in which case a court qould rectify this easily.
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Sarah, Editor, eFinancialCaree
13 December 2010
@Derivtrader - I can see your point, but when I've queried it with lawyers I've been told that paying contractual commission isn't a way around the FSA's bonus requirements in banks. Apparently, the FSA would simply see it as an attempt to dodge its bonus-related compensation rules and would still require banks to instigate deferrals etc. It may be that IDBs like Cantor have been able to dodge this because they weren't caught in the FSA's rules last year. In future they will be allowed to apply the rules 'proportionately, which will also give them more leeway than banks.
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DerivTrader
13 December 2010
To Sarah:
Contractual commissions are not part of any Bonus Scheme and are not categorized as such. They are a contractual obligation and part of the pay package. Brokers at Cantors (and elsewhere as well) are getting north of 30% paid every month in commission on the generated brokerage. If you can't avoid the 50% tax bracket (as it encompass every revenue) you clearly get around the 3y deferral, you don't get any bonus volatility on the stocks ... Not even talking about the fairness of the discretionary bonus ....Traders are in fact the only profession accepting to work for an unknown diuscretionary payout. Lets talk about Math geniuses ....
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ewe
13 December 2010
And what about M&A guys? How would you pay the junior to mid-ranking guys who are not 100% revenue generators but also execute transactions brought in by the MDs (and support in origination efforts)?
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