A recent story from BBC news that UK banks are to pay billions in bonuses (although down from last year) has attracted a lot of media attention and I have been asked for my views:
The reality may be that the reduced bonus payments are more reflective of market conditions than a new years resolution from the financial services sector to tow the line of the governments scratched record pledge to tackle “unacceptable bonuses”; and lets not forget the recent rush to increase the basic remuneration of some bankers in an attempt to pre-empt the recent EU bonus cap announcement. 2011 should slowly usher in a new prudent regime which eschews risk, and rewards staff by awarding deferred compensation, rather than cash bonuses.
However, I predict that the reaction to the donkey bray from the Government for the sector to show restraint in awarding unacceptable cash bonuses will actually have the effect of promoting a shift towards promoting increasingly high levels of deferred compensation. The level of deferred compensation awarded in 2011 could set a dangerous precedent; and if not supervised could spawn an entirely unexpected new problem in the future.
The recent announcement about bonus levels will usher in a new season of banker bashing; but before gathering pitchforks in the market we should look to the recent developments in the financial services sector, which have not been very well publicised: On New Years day HM Treasury announced a newpermanent levy on banks’ balance sheets(0.05 per cent, rising to 0.075 per cent from 2012 onwards); the FSA has published a new remuneration Code; the European banking Authority (EBA) came into being (in London) on new years day. With the new bank levy predicted to bring in an additional £2.5bn to the HM treasury coffers; and a recent report from an accountancy firm recording that more than 11 per cent of the UK’s total tax last year came from the UK’s financial services industry many banker bashers will realise that we need to be careful not to kill the goose that lays the golden eggs; and the regulators will also need to ensure that the industry does not allow high levels of deferred compensation to fatten up that same golden goose, leaving the UK tax payers with a new type of fois gras.