London’s bonus culture is already overhauled

EVEN before yesterday’s vote by European Union lawmakers to restrict bankers’ bonuses, City institutions had been working to address regulatory concerns about the role of the bonus culture in the financial crisis. The EU legislation – expected to be ratified by the European Council of Ministers later today – is likely to raise the bar even higher in some countries. However, many City firms have already slashed the annual cash bonus element of workers’ remuneration packages while introducing deferred compensation – such as share options that can only be realised several years down the track, provided performance criteria are met.

Bankers attending a round-table meeting at a leading law firm this week were clear: it is the deferral element of the changes that has most upset them. Presumably the requirement to cap the cash element of bonuses for those in financial services business at 30 per cent will also hurt.

The one relief is that there is no overall cap on bonuses and many banks have already hiked base salaries to offset the changes they’ve made.

Timely research from Mercer published yesterday highlighted the new emphasis on base salary and long-term compensation in the pay mix. The report analysed data from 39 financial services firms, of which 66 per cent were banks and 26 per cent insurance companies. It found almost all respondents to the survey said they had changed the weighting of components of their remuneration packages – 70 per cent have increased base salaries while decreasing annual cash bonuses.

There are also far fewer guaranteed bonuses being paid out and 54 per cent of respondents have introduced caps or maximums for bonus pools, rising to 60 per cent for individual payouts. More than 65 per cent now have a mandatory bonus deferral programme, yet just 40 per cent have so far linked these deferrals to subsequent performance. Performance-based deferrals are more prevalent in European-based firms with 53 per cent of respondents using them compared to North American firms where just 10 per cent were using deferrals.

Measures such as these go some way to address concerns that a short-term bonus culture within the financial services sector encouraged excessive risk taking and contribute to the global financial meltdown, Mercer argues.

Mercer partner Vicki Elliott says: “Our survey shows that there has been significant progress in responding to the regulatory guidance. However, there is still more work to do to fully comply with the regulators’ intentions, particularly ensuring that performance measurement is aligned with the nature and time horizon of risks.”

The next question for City firms is how much discretion the FSA – or the Bank of England once the two become one – will be able to use when implementing the new rules. The other issue of whether the changes will spark a brain drain to the Far East and Middle East still seems unlikely.