Bankers in the City of London are keeping their heads down as the annual bonus season gets underway. Like grouse in mid-August, braying, vintage Champagne-swilling bankers are directly in the firing line in the dark, bitter days of January and February.
It does not matter that bonuses are expected to be down on previous years, following a tough 12 months, or even that investment banks have been busy reforming the system of variable pay that has existed in the industry for more than 20 years.
This year there are several reasons why investment banks will want to downplay the annual bonus round and their employees will be keen to put on hold any plans for conspicuous consumption.
The first reason is that the bonus season comes only months after six banks – including Royal Bank of Scotland and HSBC – paid a record $4.3 billion in fines for foreign exchange manipulation. Some banks, including Barclays, are still negotiating with the regulatory authorities on both sides of the Atlantic on this one so it would not do to irritate them with tales of bumper payouts.
The banks’ bonus plans need to be approved by the UK’s two financial regulators early in 2015 and the Financial Conduct Authority has repeatedly warned banks to take conduct issues into account when awarding bonuses, so as to minimise the impact on shareholders.
The second issue is that the EU bonus cap – opposed by the City, the Bank of England and the Chancellor George Osborne – came into effect on 1 January last year, restricting bonuses to 100 per cent of salary or 200 per cent with shareholder approval.
To get around the cap, banks are hoping that regulators will allow them to use ‘role-based’ pay or allowances, which can be varied each year.
But the EU has already expressed disdain for such manoeuvring and attracting attention around bonuses at this stage in negotiations would not help the banks’ case.
The final and perhaps most significant reason why banks do not want to draw attention to themselves is that it is now just four months to the General Election and Labour has made bankers and the super-rich a bona fide target.
The Shadow Chancellor Ed Balls has said that he wants to raise £1.5 to £2 billion from a levy on bankers’ bonus pools, and claims that reform of the City has not gone far enough.
Banks worry that a new administration will want to distinguish itself from the Coalition and please supporters by imposing new financial penalties on the banks.
JUSTIFYING THEIR EXISTENCE
While banks are obliged to report what they pay in bonuses as part of their financial results, explaining why some employees are still receiving payouts that are multiples of their base salary is not an easy task.
Few bank executives or PR professionals wanted to speak on the record about bonuses, but many identify the same problems in trying to communicate with the public.
The first problem to overcome is one of language. A bonus to the person in the street is a one-off additional payment that is invariably a proportion of a person’s regular take-home pay.
In the banking world – or rather the investment banking and trading world – bonus is short hand for variable pay, which changes based on a bank’s and an individual’s financial performance. In other words, it is pay that goes up or down depending on whether, first, the employing bank has done well, and secondly, on whether the employee has performed well.
The biggest cost for banks is their people, so they need to be able to vary what they pay, in the event that their business performs badly.
But using the word bonus irks people in other walks of life, who believe a bonus is something paid for an exceptional or unusual performance, rather than an annual payment in effect for just turning up.
A former senior executive of a big bank says: ‘You are always on a hiding to nothing. Bonuses are on a scale that is very difficult for the ordinary working person to comprehend. To talk about a payment that is three to four times annual salary just seems disproportionately high.’
And the media are in no mood to help out the banks when it comes to explaining this. While the financial press may be thoroughly versed in the complexities of bonus culture, the editors and executives who decide which stories are given greatest prominence are as uncomprehending (and usually as outraged) as the general public. It matters not that many leading company chief executives are now paid considerably more than chief executives in the banking sector.
‘You put your best foot forward – but you can’t expect to win the argument,’ the executive says.
In the run up to the reporting season, the investor relations team of any bank will work closely with the communications team to explain how the bonus pot was arrived at. A narrative will be created that describes who has received what and why, including where the bank’s performance has improved and declined. Banks need to show that bonuses are conditional on certain targets being achieved, and that bonuses can be clawed back or used to tie-in staff.
‘You need a robust story that you can walk analysts and journalists through. They need to be shown how bonuses are linked to success not to failure. You need to explain that banks have to pay within their market – or their staff will be poached by competitors,’ the veteran banker says.
In recent years, banks’ payouts have been decreasing, because of lacklustre money markets and an absence of mergers and acquisitions. But the numbers are also getting harder to communicate. A greater part of bonuses is now paid in shares, which can not be touched for some time. And £1 in cash is not the same as a £1 in shares.
‘There are a lot of people out there who are not interested in the subtleties,’ one bank insider says. ‘A lot of people think that they will be criticised whatever they do and that they have to suck it up.’
Equally, you could counter that the banks’ claims that talent will leave – either for competitors or for cities like New York or Hong Kong – does not tally with the evidence that City employment is growing, or that London’s population is now at an all-time high.
Andrew Walton, who previously worked in Morgan Stanley’s communications team for six years and is now head of global financial services at FTI Consulting, says: ‘Full and transparent disclosure is not only an obligation but a virtue. Only when people see the facts, are they more inclined to listen to your justification.
‘For most banks, bonus payments have been coming down significantly due to reforms. It is important to communicate that downward progression first and foremost.
‘The reasonable observer sees through populist attacks and accepts that the UK has a hugely valuable asset in our financial services industry that has to compete globally for talent.’
Another PR adviser to the financial services sector says that while the heat has come off the industry on this issue recently, there is also a feeling of resignation in the sector.
‘They feel that there isn’t much more that they can do – or even that central banks or politicians can do. After all, they have laid down some very strict rules. There is also a feeling that common sense will prevail, which may be naïve.’
It is naïve because, arguably, Britain’s investment banks have not satisfactorily explained the value to the economy of what they do. Nearly six years on from the financial crisis and they have still not been able to convince the wider public that the industry does something that is valuable.
‘There is more to be done on this because the politicians are still not finished on the need to restructure the industry, for instance to separate retail from investment banks,’ the PR consultant concludes.
Matt Carter, founder of Message House, an agency which specialises in messaging research and communications campaigns, says: ‘The bonus round is a vivid, annual reminder of a set of values in banking that are a long way from the banking culture people want.
’Banks who try to justify multi-million pound bonus pools are fighting a lost cause. Rather than defending their bonuses, banks need to do much more to engage their customers, who feel neglected, abused and often literally ripped off. Demonstrating a different set of values, particularly in their dealings with customers, is what will win back trust and ultimately stop the political attacks.’
Adam Powell, head of corporate at Ogilvy Public Relations, points out that the fact that the polls are so close underlines the need for banks to make their case strongly when explaining bonuses.
‘If Labour forms a minority government, it may be that it steps up its attacks on business. Ed Miliband so far has shown little affinity with business and it is always tempting for a new administration to distinguish itself from what has gone before. Even if Labour decides not to target a new tax at the banks, it is unlikely to go into bat for the financial service sector – for instance, taking on Europe over bonuses – in the way the Conservatives did,’ he says.
If the banking industry has really changed in the way that it pays people, then it needs to make its case strongly. But the sight of a whole industry trying to think up ways around a bonus cap is only going to confirm in the public’s thinking that the politicians are right to target the financial sector.
Banks are currently the second most hated industry across the globe, after the media, according to Edelman’s 15th Trust Barometer, published last month. Ed Williams, chief executive of Edelman’s UK arm, says: ‘The difficulty for the financial services sector is the extent to which a negative public, media and political narrative about bankers has become ingrained. When it comes to bankers pay, the industry itself is caught in a trap. On the one hand it has to compete globally for talent in what is a highly competitive market. But on the other hand, the kind of compensation that is being offered is a quantum leap from average wages in the UK.
‘This is one of those public issues that rational argument in respect to the greater good of the country is trumped by individual perceptions of what is and isn’t acceptable levels of pay.’
He advises that while there is no simple solution to the problem, there are some basic things that banks can do to rebuild trust.
‘Pay expected levels of taxes, be seen to act responsibly and be transparent in business practices. Barclays have very publicly talked about transforming their culture after recent scandals. Their experience shows that you can rebuild trust. It’s a hard slog, but you can do it if you put core values at the heart of your business strategy.’
But with the General Election scheduled for May, there seems little chance of banks reversing the public’s lack of trust in their industry before the all-important vote.