UK Bank Bonus Debate

Less than a year ago, some of Britain's biggest banks such as Lloyds and the Royal Bank of Scotland faced collapse. As they begged for taxpayers' cash, bank chiefs lined up before a parliamentary committee and apologized profusely.

Now, however, the situation looks somewhat different. Although unemployment continues to rise in the UK, there are signs that the worst downturn in decades could be coming to an end; output from both manufacturing and services is up and the pound is performing well on currency markets. The banks seem to be among the first to benefit from the improved financial conditions.

Million euro salaries

John Purcell, one of London's top head hunters, said the good times are just beginning to roll again – especially for the star traders and dealers, the so-called "rainmakers".

"We've just heard that one of these rainmakers has just gone from one bank to another for a basic salary of £40 million euros (47 million euros, $67.6 million)," Purcell said.

"It's huge bucks."

The British bank group Barclays PCL, which benefited indirectly from taxpayer support for the financial industry, but did not take a direct cash injection, is expected to pay out large bonuses after posting a bumper 2.2 billion euro ($3.16 billion) profit for the first six months of the year.

Guaranteed bonuses

Bob Diamond, head of Barclays investment arm, Barclay Capital conceded that the bank has hired 200 staff on guaranteed bonuses since November last year and admitted to having contravened regulatory guidelines by awarding multi-year guaranteed bonuses to "less than a handful".

"It is pay for performance and it is based on principles we have followed for a while now," Diamond said.

The bonus pool for British employees at the US bank Goldman Sachs is even bigger – 7 million euros.

But, the backlash has begun. Jack Dromey, the deputy head of the Unite labour union, said the evidence was “absolutely clear” that precisely these extravagant rewards fuelled the risky behaviour which caused the economic crisis in the first place.

"There are some that have learned absolutely nothing from the debacle of the past," Dromey said. "A debacle that has put at risk the jobs of hundreds of thousands that we represent.

Inflated profits?

Even among enthusiasts for the free market system, some are worried. According to former investment banker Ros Altman, people have to ask how “meaningful” these profits actually are.

"Are they just exceptional items that we are managing to earn because the cost of funding is so low and the competition has gone away for a while, or is this some kind of real recovery," Altman asked.

As in the United States, British banks received unprecedented levels of support from the taxpayer – more than 1.4 trillion euros worth.

Since the beginning of the financial crunch, the Bank of England (the British central bank) has held short-term interest rates unnaturally low, allowing financial institutions to borrow cheaply and make a bigger profit on their loans.

All this makes the return of the bonus culture even more embarrassing for Prime Minister Gordon Brown, who denounced the lavish payouts in parliament barely six months ago, stating then that "the short-term bonus culture in banks has got to end."

Necessary evil?

However, the bonuses are proving all but impossible to banish. For one thing, says Jillian Tett of the Financial Times newspaper, the banks themselves have little choice because they are “operating within a competitive environment.”

"There is concern among the banks that if they don't pay people well, they could lose some of the key people they need to keep their businesses," Tett said.


With billions of euros worth of British taxpayer's cash invested in some key British banks, the government has a keen interest in the financial institutions quickly rebuilding their businesses. Financial services are also a vital source of tax revenue for the UK government.

According to Tett, this means a unilateral crackdown on bonuses is potentially out of the question.

"If the UK were to act alone in trying to clamp down on the bankers, if it didn't act within an international coordination, there is a real risk that the business could simply rush out of the UK," Tett said.

Tett pointed out that one of the "tragedies" of the crisis is that at the very time governments need meaningful international coordination to change the way financial systems operate, "the severity of the crisis means there's a growing tendency for each country to take measures without that kind of international coordination."

Nevertheless, political pressure is increasing. As unemployment and home repossessions rise, so does resentment towards bankers' bonuses. A recent article in Rolling Stone magazine describing Goldman Sachs as "a great vampire squid wrapped around the face of humanity" has received a great deal of attention in the UK.


Author: Stephen Beard in London (kh)
Editor: Rob Turner