Page last updated at 19:03 GMT, Tuesday, 16 February 2010

Why bankers are still making millions

By Edwin Lane
Business reporter, BBC News

Canary Wharf skyline
Bonuses are back for many in London's financial firms

"Restraint" was supposed to be the name of the game when it came to bankers and their bonuses this year.

Then came the decision by Barclays to pay its staff a record £2.7bn in bonuses for 2009.

The bank will argue that it is paying staff much less than normal, given its enormous £11.6bn profits, and more money than ever is being paid in deferred instalments or given in shares.

But it is still big money. At Barclays Capital - Barclays' investment bank where the majority of profits were made - total pay will top more than £4.2bn.

That puts the average pay packet at £191,000, and for the top performers total pay for their year's work will be in the millions.

Meanwhile the market leaders in investment banking, Goldman Sachs, paid its staff a total of £10.3bn for last year (about £300,000 a head on average) and even the struggling Royal Bank of Scotland, which is expected to announce massive losses next week, will pay its bankers £1.3bn.

Bankers' pay, according to the analysts, is already back to pre-crisis levels - despite promises from ministers to crack down on the City's "excessive" bonus culture.

The market rate

So after the biggest crisis ever to hit the banking sector, and billions of pounds of taxpayer support, why are banks still paying their bankers so much money?

The answer, according to the banks' HR departments, is simple: You have to pay the market rate.

20 notes
Barclays Capital: £4.2bn, including £2.7bn bonuses, shared between 22,000 employees.
Goldman Sachs: £10.3bn shared between 32,500 employees.
JP Morgan: £17.1bn shared between 200,000 employees. £5.9bn paid to investment bankers.
Morgan Stanley: £9.1bn shared between 45,000 employees
Citigroup: £15.8bn shared between approx 200,000 employees
Bank of America/ Merrill Lynch: No total compensation figure given. Reports suggest £2.8bn paid to investment bankers, shared between 11,000 employees.
Credit Suisse: £8.9bn, including £3.8bn bonuses, shared between 47,600 employees
Deutsche Bank: £9.8bn, shared between 80,000 employees.

Good investment bankers are a sought-after commodity. As such there is a market rate for their services and if you won't pay that market rate then you can expect to lose them to rivals willing to stump up the cash.

And with a limited number of good bankers around, losing staff is not the way to run an investment bank.

"Losing good staff means losing market share," explains Chris Roebuck, a former senior HR executive at a number of global banks, and now an Honorary Visiting Professor at Cass Business School in London.

"You can either pay them or let them walk across the street and take your market share with them."

The ease with which bankers can move from one bank to another cannot be overstated.

First, there is the small army of headhunters and 'executive search' firms whose role is to move bankers from Bank A to Bank B and make a profit in the process.

Secondly, the investment banking community is a small one, with half a dozen firms offering virtually identical jobs, all conveniently located within a square mile of each other.

"There's no other industry I can think of where you can be paid a £2m bonus, leave after your three-month notice period, and walk into a new job with a guaranteed £3m bonus," remarks Patrick Field, the managing director of the headhunting firm Hanover Search and Selection.

Employee power

So how do you set the market rate for an investment banker?

Their ability to consistently make money for their employers is the most obvious factor. A track record of making money through trading obviously increases a banker's value.

If you're paid half a million a year... you begin to think that's what you're worth
Paul Hammond, managing director of Hammond Partners

As a result star performers - with a natural gift for market trading - can pretty much demand what they like in compensation negotiations.

They can also push up the market rate by playing off two potential employers against each other.

"If you're a bank and you're going to try and poach people from a rival bank you will have to offer them more than they are currently getting," explains Chris Roebuck.

"They can then go back to their current employers and demand a pay rise. More often than not they will get it."

That, Mr Roebuck argues, is what has caused bankers' pay to rise by such astronomical amounts over the past 20 years, as every year the amount banks have to pay their staff rises.

That the majority of that pay is typically in the form of a bonus is unimportant according to another headhunter, Paul Hammond, managing director of Hammond Partners. Bonuses are now expected.

"Bankers have gotten used to thinking in terms of their total compensation rather than their pay in terms of a base salary and a discretionary bonus," he says.

"If you're paid half a million a year for five years in a row, you begin to think that's what you're worth."

This is despite, he adds, the fact your base salary might only constitute a tiny proportion of that payout.

Back for good?

So despite the brief stutter of the global financial crisis, is the big bonus culture of the City here to stay?

The answer will depend on the political appetite for a change to the system.

So far, efforts by the G20 and regulators have focused on bonus deferrals and increasing the proportion of bonuses paid in shares. Neither are new ideas, though they have already changed the way pay is being awarded.

The need to prevent another financial meltdown is also downplayed. Few in the City regard excessive bonuses as the cause of the crisis.

Bankers and head hunters alike, while admitting that bankers' pay can seem "obscene", suggest that the government will leave bankers pay alone.

It is a price worth paying for the huge economic benefits the financial sector brings to the country, they say.

As Paul Hammond warns: "If the government intervenes in bankers' pay, it will be shooting its own golden goose."

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