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As a financial services recruiter with exposure to a number of front office areas, we are regularly asked by clients to give them an insight into “bonus season”. With most firms having now announced, or paid, annual staff bonuses and with the recent news from the EU relating to bonus caps, we thought it would be a good time to discuss what is really going on and the long term effects.

The numbers

Recent estimates from the Centre for Economics and Business Research (Cebr) show a further downward revision in the forecast for City bonuses. The level of bonuses forecast to be paid in the early months of 2013 is now down to £1.6 billion – from a peak of £11.6 billion in 2008 and revised from a forecast £2.3 billion made by Cebr 6 months ago.

Fram Search - bonusesAccording to Cebr this reflects two factors, namely a collapse in City activity during the summer of 2012 (equity trading was down 20% and UK M&A activity fell by a third during 2012). In addition, they highlight bonuses being publicly contentious and therefore City firms are increasingly substituting salary for bonus. The average City bonus per employee was £12,000 for the financial year of 2011/12 this was still seven times the national average for the private sector. With circa 250,000 people working in City type jobs in London in 2012, the figure of £12,000 takes into account individuals working in a wide range of roles.


In short bonuses have been low this year, and there are a high number of individuals who will receive no bonus, as firms are becoming increasingly strategic in how they allocate bonus pots. However, often the key thing about bonuses is whether they meet with expectations. In the boom days part of the bonus game was to always feign disappointment, but the evidence we gather through daily interviews is that there is a general acceptance that ‘the world has changed’ and bonuses will be low. However, this isn’t to say that employee acceptance means that motivation isn’t being adversely affected, quite the opposite. To date, a bonus has been a key motivator used by management teams in financial services.

What is the likely effect of a low bonus environment?

Certainly figures that focus purely on bonuses cannot give a complete picture when it comes to City remuneration. When the FSA last published its remuneration code some bankers, against a backdrop of virtually no basic salary growth over the last few years, found that their basic salary was increased so that variable compensation was a lower percentage of their pay. In all likelihood this will probably be the effect of the EU’s recent vote to cap bonuses.

It will be interesting to see, however, if capping bonuses is the right mechanism to reduce risk taking and to encourage social responsibility. There is a clear argument that if people rely less on bonuses then they can act more independently. Whilst normally an issue for shareholders to decide, governments, having bailed out banks, now have a legitimate right to influence remuneration – particularly if there is an implied guarantee they won’t let large banks fail. However, what the EU can’t control is human emotions such as a desire to be promoted or be seen to run the most profitable team – all competitive instincts often found in City employees. Therefore, is there a counter argument to say that risk taking won’t be reduced at all, as employees with larger basic salaries won’t feel the pain of taking poor business decisions?

In addition, the decision taken by the EU could have the unintended consequence of increasing the fixed costs of financial services firms. This creates two main problems, firstly basic salaries are virtually impossible to claw back, and secondly it gives firms less ability to expand and contract its work force to reflect market trends. Given approximately 100,000 people are believed to have lost their jobs in the City since the start of the financial crisis, the added cost of redundancy payments could be astronomical in a downturn. This in turn could make the EU a less attractive place to base a financial services business.

The EU also doesn’t take into account that finance is a global industry and therefore leading financial centres also need to have the ability to attract the best talent. Surely, the brightest brains will drive any recovery in financial services. You would also hope that these same individuals are intelligent enough to realise that financial services needs to be rebuilt in a more robust manner. However, what we don’t believe will happen is that thousands of EU based bankers will migrate to other financial centres. There was a fear when the UK government increased the top level of income tax to 50% that this would happen. There was also a similar fear when changes were made to tax rates for res non-doms. On neither occasion was there a mass exodus overseas. Whilst experienced individuals are attractive to fast emerging financial centres, people have lives outside of work that can’t be so easily uprooted and London is still considered a nice place to live with good schools. However, there is a danger that you lose the more dynamic parts of your workforce. We definitely saw some top performers looking for roles in more favourable tax regimes, and often your innovators and agents of change are drawn to more vibrant economies. Should we be wrong, and there is a gradual outflow of skilled workers from the EU, the question is how long until we see either the UK government or the EU arguing  a case for following the lead of US in taxing its citizens on worldwide income, regardless of where they reside.

The real challenge for any management team at the moment is how to motivate and reward staff for hard work and success, whilst ensuring the right behaviours are demonstrated. This is arguably more of a management, rather than a reward, issue. Looking at past failures, there was a breakdown of checks and balances at political, regulator, and senior management level, and the negative effects of this cascaded down through businesses. Financial services must now look to other industries in firstly how they manage and secondly in how they pay. Executives can often manage far larger teams in other sectors (in terms of number of employees), and it isn’t uncommon for these individuals to have their bonuses contractually capped at 100 – 150% of basic salary. It is highly unrealistic to think these executives aren’t motivated to the same extent as those in banking. Until these issues are fully resolved, capping bonuses may not have the EU’s desired effect of reducing risk taking and reshaping the industry.

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