City bonuses will plunge to 2003 lows

THE TOTAL value of City bonuses is set to plunge nearly 40 per cent to £4.2bn this financial year as Eurozone turmoil and weaker bank profits drag down payouts to barely a third of pre-crisis levels.

The level of bonuses in 2011-12 will be the lowest for nine years, according to the Centre for Economics and Business Research (CEBR). It expects payments to be subdued until 2016.

The report comes after a string of disappointing third-quarter results from some top banks and is a further blow to chancellor George Osborne’s plan to repair the public finances.

The tax take from bonuses will be around £2.5bn in 2011-12, or 60 per cent of the £4.18bn paid out, compared to the £6.8bn collected by the Treasury in 2007-08 from a bonus pool of £11.57bn.

Douglas McWilliams, chief executive of the CEBR, said: “Although I wouldn’t want to be a Porsche salesman now… the real losers from falling bonus payments are the Treasury and the taxpayer.”

The report also said the total paid in City bonuses is unlikely to recover quickly. The bonus pool will be virtually flat at £4.17bn in 2012-13 before rising one per cent to £4.22bn the following year, in part because more payments are being deferred.

By 2015-16 the total will reach £4.65bn, the CEBR said.

Banks have had to slash cash bonuses following new European rules which effectively stop bankers from taking any more than 20 to 30 per cent of their bonus in up-front cash.

Bank profits have been hit as Eurozone leaders struggle to tackle the sovereign debt crisis, while investment banking divisions have suffered falls in revenue at their fixed income and equity trading arms as the volume of work slumps.

Rob Harbron, co-author of the CEBR report, said the drop in bonus payments is a concern for the reputation of London as a financial centre.

“With financial services helping drive the capital’s economy and London historically leading the growth of national output, subdued activity spells more weak prospects for the coming year.”

Last week Goldman Sachs said the cost of pay and bonuses had dropped 59 per cent to $1.58bn (£985m) after it reported its second-ever quarterly loss as a public company. At UBS, quarterly pay costs rose to 94 per cent of revenue in its investment banking arm, reflecting deferred payments from earlier in the year, after net profit plunged by more than a third.

The City will shed more than 26,000 jobs this year, the CEBR said earlier this week. In the US, the Federal Reserve has said more than 60 per cent of the bonuses of top bank executives are being deferred.

Despite this, separate research showed that directors at the UK’s top companies saw their pay and benefits increase by 50 per cent in the past year, to an average £2.7m. Chief executives’ pay rose by 43 per cent, Incomes Data Services said.