Focus on: Bankers' bonuses

Needless greed or market necessity? Marta Szczerba investigates
Investment banking

With the bonus season upon us, the British media has been full of bonus-bashing statements from politicians and commentators alike. The public has questioned the coalition's decision not to intervene in bankers' pay given the government's monetary support to the banks during the financial crisis and the consequential burden to the taxpayer. However, despite the angry rhetoric, CEOs of major banks remain defiant and refuse to curb this year's payouts.

The public outcry over bankers' remuneration comes amid expectations that payments for leading City bankers will total £7 billion this year, with leading banks setting aside almost £40 billion for their total bonus pool. Although bonus allocations are predicted to be no greater than last year, banks are paying out a higher share of their falling revenues. The most contentious issue is the payment of bonuses to staff in banks which are partly owned by the taxpayer. Eric Daniels, the CEO of Lloyds Banking Group, which is 41 per cent government owned and received £17bn in bailout funds, is controversially set to get a £2 million bonus. Stephen Hester, boss of RBS which is 84 per cent taxpayer-owned, could receive £2.5 million.

Politicians' anger with bankers' bonuses was evident during last week's questioning of Bob Diamond, the CEO of Barclays, by the Treasury Committee. Diamond was repeatedly pressurised to give up his bonus for 2010 (as he has done for the past two years) and was asked, using the biblical reference, why it is harder for a rich man to enter the kingdom of heaven than for a camel to go through the eye of the needle. Diamond remained composed, stating that banks' period of "remorse and apology" is over. He also refused to confirm whether he will accept his bonus this year.

Labour is the parliamentary party which has been most vocal in criticism of bankers' bonuses. Ed Miliband challenged David Cameron on his manifesto pledge that no banks in which the taxpayer owns a significant stake should pay cash bonuses more than £2,000. He also urged the coalition to bring back the bonus tax, which was introduced by Alistair Darling as a one-off measure in December 2009. Currently, banks are subject to a bank levy on their balance sheets, which should bring £2.5bn annually into Treasury's coffers.

The attacks of the opposition have resulted in renewed pressure on ministers to reach an agreement with the banks that will result in increased pay disclosures, lower bonuses and increased lending to businesses. George Osborne is also lobbying for an EU-wide deal on disclosure of pay bands above £1m. The negotiations are ongoing, but there are worries that the disclosure of salaries may breach confidentiality and data protection rules. It remains to be seen whether the government will manage to restrict the size of bonuses, but so far there's been more tough rhetoric than direct regulation. With the financial services sector vital to the UK's economy, it's doubtful that an agreement will be reached anytime soon.

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