Tide turns on banking bonuses in UK and US

Governments on both sides of the Atlantic are taking action to impose firm limits on banking pay and bonuses. This transaltantic tide of action on top finance sector pay follows public outcry at the extent to which bonus culture is argued to have caused the credit crunch by promoting excessive risk-taking.

Popular exasperation with finance pay is neatly expressed in an impassioned article by Simon Caulkin on the Observer website. According to Caulkin:

It was the market that created the problem: top pay has been one of the most egregious market failures of the last 20 years. [...] Unregulated top pay is simply unsustainable.

The same article also describes how the US government has taken aggressive action to constrain banking pay excesses, with President Obama doing “the unthinkable, in effect imposing a maximum wage ($500,000) on top executives of firms that receive ‘extraordinary help’ from the US government.”

Over here, the Treasury has commissioned an independent review of the corporate governance of the UK banking industry (on the HM Treasury website), which will make its final recommendations towards the end of 2009.

In a speech yesterday (9 February 2009), Gordon Brown gave us some idea of what the review will have in store for boardroom pay, outlining his professed commitment to a “no rewards for failure” policy (on the Number10 website). Brown stated that:

The old short-term bonus culture is gone; that there are no rewards for failure, but penalties for failure; that in the future there must be rewards for success – but long-term sustainable success and not just short-term gains.

Elsewhere, the Centre for Economics and Business Research (CEBR) (external website) puts forward the less popular argument that the banking sector is already taking steps to correct itself. In a press release published yesterday, it says that:

CEBR’s forecasts indicate that bonuses by this year [2009] are likely to be down by 70% from their peak and even by 2012 will be only back to 48% of their peak levels. So it looks as though the market will – having got it wrong initially – sort out the excess bonus problem.

I’m very interested to find out where our readers stand on these issues – feel free to get in touch with your views.

• IRS is conducting a major survey investigating how organisations manage and award cash bonus and incentive payments. This research will enable participating organisations to benchmark their practices and experiences in all areas of bonus/incentive provision. Click here to participate. Closing date: Friday 20 February 2009.
• Has your organisation recently carried out an annual pay review? If so, and if it has now been settled, please get in touch so that we can add your organisation’s pay award to the IRS database.