Jerry Blackett: EU rules could shift banking
Dec 24 2010 By Jerry Blackett
European regulators have clamped down on the bonuses investment banks pay. This is likely to see compensation packages shifted, resulting in higher salaries and lower bonuses. The numbers of bankers caught by this legislation will be few – maybe no more than 100 per bank.
Worryingly, the rules will not be applicable outside the EU, raising the risk that investment banking will grow in centres like New York at the expense of London and Frankfurt.
Maybe a move away from bonuses in favour of salary is not such a bad thing. I used to work for one of the big U.K. high street banks and by the time I left in 2003, the bonus culture was well-embedded. Until the early ‘90’s, bonuses were modest affairs. Then as the push for sales gathered pace, so a bonus culture developed.
What was new was the potential to earn sizable sums from being part of the bank’s mainstream banking team. I can remember a business relationship manager I was indirectly responsible for earning almost the size of his salary in a year-end bonus. He’d been in the bank 30 years and had trounced his targets for fees and interest. He’d done it off the back of a few big property deals. I remember asking him what he thought of the bonus cheque he’d just picked up. Apart from being delighted, he said he didn’t think that the incentive to earn a bonus had led him to behave any differently. He enjoyed helping his customers.
Such large bonus payments at relationship manager level were rare. However, further up the management/directorship ladder the potential for earning large figures was more common. By the start of 2000, bonuses were embedded in the leadership culture. Contrast what the CEO of a major bank was earning then with that of their predecessor 20 years ago. The difference was enormous.
Whether in banking or not, the ultimate test of paying bonuses is whether they incentivise individuals to produce better results. Devising bonus schemes is now an industry in itself. However, proving a link between bonuses and performance remains elusive. I think it is this uncertainty that lies at the heart of the scrutiny around bank bonuses.
However, unless we find a better system, it does not seem smart to disadvantage the UK’s leading role in the world’s financial markets.
* Jerry Blackett is chief executive of the Birmingham Chamber Group
