No fall in Barclays bonuses

 
Barclays

I would expect Barclays in results on Tuesday to disclose it is paying more in bonuses to its investment bankers than the £1.3bn it paid for 2012 - and that it has allocated a higher proportion of investment banking revenues to the pay of its investment bankers than last year's 39%.

My sources there tell me that the board has become increasingly concerned that its huge investment bank is being damaged by defections to higher-paying US banks - and is therefore maintaining pay and increasing it for some, even though revenues have been under pressure.

The bank is increasingly concerned that it has become too easy for the giants of Wall Street to pick off its best people, by pointing to the looming imposition of the EU's cap on bonuses.

Which is why Barclays is finding ways to get round the bonus cap and feels the need to publicly make it clear that it still offers substantial rewards for investment banking stars.

None of which is designed to make it popular with millions of British people, whose living standards are not yet rising and who continue to feel sore about the widespread misconduct by bankers and their contribution to making most households poorer.

But Barclays, if true to form, will point out that its top people will be deferring their bonuses, such that they will not be able to spend them for months and years. And it will highlight that a huge chunk of bonuses is these days paid in shares rather than cash.

Which leads on to the important questions of how to pay bonuses fairly and how to pay them prudently - questions which politicians and regulators have a tendency to elide and confuse.

The important point is that prudent pay may in an important sense be less fair pay, from the perspective of taxpayers who rescued banks in 2008 and still provide the ultimate safety net for them

Here is why.

The prudent way to pay bankers is in shares, because paying them in cash depletes banks' vital, loss-absorbing capital.

London's Canary Wharf

And, as it happens, paying them in shares actually increases banks' buffer against losses (since the shares are that buffer).

Also - but only maybe - paying bankers in shares may encourage bankers to take fewer dangerous risks that could damage their respective banks, because if a bank were to go down, pop would go the value of the shares.

However I say only maybe, because there is plenty of evidence of business folk ramping up the value of shares in a dangerous and short-term way, in a frantic attempt to sell the shares at the top.

So share-based rewards are no guarantee of sensible behaviour.

But let's park the question of whether any form of pay can counter greed-motivated reckless conduct.

The point is that all banks have been handing out wodges more shares to their top people, rather than cash, under pressure to do so from regulators and politicians.

You will probably remember that very recently the prime minister boasted in the House of Commons that semi-nationalised RBS would continue its habit of the past few years of paying no more than £2,000 in cash bonuses, and that therefore the bulk of bonuses would be in RBS shares.

And last year Barclays, which is much bigger in investment banking than RBS and therefore pays much more in bonuses than RBS, made share-based payments to its people of £818m, including £446m of bonuses in deferred shares (or shares that can't be pocketed immediately).

So although it may be prudent to pay an increasing proportion of bonuses in shares, is it actually fairer?

Well there are two ways of evaluating this.

Barclays

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If you think that bankers are paid too much, then whether they are paid in shares or cash is irrelevant. Both are currency.

In fact, any financially astute banker working for a half-decent organisation in a time of recession would much rather be paid in shares rather than cash.

Why is that?

Well, because the shares would be awarded at the knockdown price in the market, and - barring crass incompetence or exogenous disaster - the price of those shares should rise over time.

Or to put it another way, when Barclays last year said that its average bonus per investment banker was £54,100 and that its top executive below board level received a £2.25m bonus, that said nothing about what those bonuses may eventually be worth to the recipients.

If Barclays' share price were to rise, those bonuses would become more valuable.

Now as it happens, Barclays' shares have gone nowhere over the past year, though over five years they're up 165%.

And there is another thing. I am not 100% sure that the chancellor is completely thrilled at the trend to share-based remuneration.

How so?

Well, of course income tax is paid on the shares as and when they are recognised as part of the bankers' income.

Which means that for most investment bankers there is tax to pay at the top rate of 45%.

But if the shares rise in value and are then sold, that gain would be liable not to income tax but to capital gains tax - at a rate roughly half the top rate of income tax.

So the trend to share-based pay is a double benefit to the banker: there is the potential for a bonus to end up being worth much more than face value; and the final tax bill should be much lower than for a cash bonus.

The chancellor can't rail against share-based bonuses, because he believes that the cash-based bonus system was at the heart of some of the banks' suicidal behaviour in the boom years.

But at a time when he needs every penny of tax he can lay his mitts on, the trend to paying bonuses in shares is not an unmitigated boon for him.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +48

    Comment number 25.

    You can counter greed induced destruction of our economy in one way only: by applying the law. Thousands, maybe tens of thousands, have willfully committed fraud and/or money laundering, still zero convictions.

    Thank you LibLabCon, thank you BBC.

  • rate this
    +3

    Comment number 24.

    No company should be allowed to pay bonuses (or indeed dividends to shareholders) until everybody employed fulltime has no need to claim benefits to survive (ie working tax credits, housing benefit, etc.).

    If they cannot pay all employees properly, the poor dears cannot afford to pay a bonus, after all, can they?

  • rate this
    +24

    Comment number 23.

    As a small shareholder of very little importance in the grand scheme I think this is absolutely disgusting.

    If I thought it would make one iota of difference I go to the AGM and make my feelings known, but the pension funds and other big investors are all in cahoots so there's no point in wasting train fare, or my breath,

  • rate this
    0

    Comment number 22.

    Wasn't last year impacted by reduced bonuses to contribute to LIBOR fines? If yes then with no fines so far this year for other matters then it will be higher. Fines for FX and commodities transactions next year may make bonuses more interesting reading.

    Other than that shareholders can vote so not a general issue. Tax is paid either way or on profits so move on.

  • rate this
    +20

    Comment number 21.

    The entire industry is overpaid. The logic seems to be that they handle vast sums so stealing a small % is ok. Odd the logic is not used for checkout till operatives. As we have seen recently stealing % of whole funds in our pensions is ripping us off for staggering sums. Yet they very rarely can do better than the market trackers.

    Pay them min wage, but let them trade their own cash no charge!

  • rate this
    0

    Comment number 20.

    As bankers have NEVER earn`t a penny in their entire existence (only taken it from those who have) why should they have any bonus at all.

  • rate this
    +121

    Comment number 19.

    Nice to know that there's a tiny section of society who can break the law by rigging the Libor and exchange rates, plunge the rest of us into the longest recession in history by their greed and incompetence, yet still rake in an annual bonus which dwarfs most people's entire lifetime pay.

    We are, of course, all in this together.

    Makes you proud to be British.

  • rate this
    +5

    Comment number 18.

    If you are not happy with Barclay's bonus schemes or question their morals, just do not bank with them.

    The only problem with this is that big banks do not want small accounts and their big customers are not bothered by morals as they too are 'on the make'.

    We need more, smaller banks to improve competition - not the current few too-big-to-fail banks working as a cartel.

  • rate this
    +47

    Comment number 17.

    "3.Alex Crane
    24 Minutes ago

    Seriously, pay someone £1million in cash bonus and you get 45% of that in tax."

    Or give some cash to an accountant who can exploit all the loopholes for you?

  • rate this
    +9

    Comment number 16.

    I have nothing against bonuses. I do think they need to be earned though not just on how much you make the firm, at my firm we have audits to make sure everything is sold correctly. This should be the same for every firm. If they are not correct thenno bonus simple if a bank fails then the people at the top dont deserve a bonus either.

  • rate this
    -12

    Comment number 15.

    #6 Barclays were bailed out just like everyone else, whaddya think ZIRP and QE is all about.

    #10 You one funny guy. First your "sourced" statistics are wrong, and second so what does it prove other than the prevelance of massive income and wealth inequality.

  • rate this
    -1

    Comment number 14.

    Since they're taxed at 50% then the only real motivator for criticising them is personal jealousy, surely? More bonuses equals higher revenue for the exchequer equals fewer cuts... I couldn't care less if some suit spends a load of money on an overpriced London pad, or a Porsche but I could care that more money is coming in to the UK coffers.

  • rate this
    +20

    Comment number 13.

    The Dick Turpins of the 21st century.

  • rate this
    +3

    Comment number 12.

    When will people stop using the word 'bonus' for things that aren't extras, these are guaranteed payments regardless of success or failure, how can they be 'bonuses' by any definition of the word?

  • rate this
    +60

    Comment number 11.

    Why do we have a safety net made up of taxpayers money? Why when a big bank or big business starts to fail the government imediately props it up with millions of pounds which you had to contribute to, but with small businesses or personal finances if you fail you fail, you become unemployed, you lose your wage and yet those at the top are kept at the top by the government sucking up to them.

  • rate this
    -2

    Comment number 10.

    5. I suspect many do. What evidence do you have to suggest otherwise? Income tax paid by 300,000 on highest incomes in UK accounts for 8% of all tax revenues (source IFS).

    Re Peston, perhaps you'd prefer only to hear from those who hold your conspiratorial views?

  • rate this
    +13

    Comment number 9.

    This argument that you have to pay more to keep staff only applies if you feel there are not enough talented people who could do this work for less.
    Whilst the banks are privately owned they should be able to take their own view on this, however, they should be left to fail should they over estimate the value of some employees.

  • rate this
    +56

    Comment number 8.

    If people don't like this then they should vote with their feet. Anyone with an account or savings with Barclays should move their money and dispose of Barclays. Only the customers of the big banks can change this, Governments have shown that they neither care or are prepared to do anything about disgraceful bank behaviour and so it's down to us

  • rate this
    -21

    Comment number 7.

    Why should they fall. Unlike PriSec Class workers Pubsec class workers don't have their pensions cut when the economy is having problems. Why should bankers behave any different than Pubsec Workers.

  • rate this
    -2

    Comment number 6.

    What has the bonus pool at a private bank which was not bailed out by the UK gov got to do with anyone?
    I don't see Peston writing articles on the pay inflation of top footballers for example.

 

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