Backlash over bankers' bonuses

Britain's bailed-out institutions are prepared to pay millions to staff, and government plans will not stop them. Brian Brady and David Randall report

A mutinous backlash is growing in Britain this weekend against banks' plans to carry on paying staff millions in bonuses as if the credit crunch had never happened. The Independent on Sunday understands that the Government intends to try to head off the rising tide of resentment against bankers by saying that it will be an "active shareholder" in the institutions receiving significant bailout cash, and say no to "excessive payments".

But the Chancellor, Alistair Darling, will stop short of an absolute veto on bonuses or a salary cap at taxpayer-rescued banks such as Northern Rock, Royal Bank of Scotland and Lloyds Banking Group. Treasury sources say he will also try to "coax" other banks to rein in pay and bonus packages. He will set up a review "which will examine how banks are managed. I expect the review to make recommendations about the effectiveness of risk-management by banks' boards, including how pay affects risk-taking."

Despite the recession, Britain's clearing banks will this month pay out millions to staff in bonuses. RBS, now propped up with £20bn of public money, wants to pay its staff almost £1bn in bonuses, it emerged yesterday. Critics contrasted the Government's "mere words" with the decisive and legally enforceable cap on executive pay and bonuses announced by President Barack Obama in the US. They dismissed the Chancellor's plans as not much more than a non-binding code of conduct, which banks are sure to flout.

Mr Darling's proposals were greeted with widespread dismay throughout the Labour benches. One former minister, Mark Fisher, said: "I don't think the public would like to see any bonuses going to these banks. This is far too modest an approach. Obama is getting nearer to the mark, but even that is quite restrained. Bonuses should be rewards for performing above the level required. These people underperformed, so we should be penalising them." And one minister said: "I would go further and take back any bonuses they have already been paid. At a time when we are asking people to pull together and contribute to the economy, we should make an example of these people."

Vince Cable, the Liberal Democrat Treasury spokesman, said the move was welcome, but it was "overdue, too vague, and not radical enough".

There is now growing concern within the Cabinet that the bonus culture is causing anger in the country, and will render ridiculous any attempts by ministers to tell voters "we're all in the same recessionary boat", while calling for sacrifices. The Leader of the Commons, Harriet Harman, announcing an Equality Commission inquiry into sexual discrimination in City bonus schemes, said: "There is something rotten in the remuneration system of the banks and finance companies. Men paying themselves millions of pounds of bonuses each – and then saying that they didn't know what was going on. Is anyone going to justify a system any more which allows for the old boys' network to fall back on a financial cushion of millions of pounds while helping to cause the problems that make others struggle?

"The Financial Services Authority ... is also conducting a review into bonuses. They will need to stop the bonus system encouraging those at the top taking risks with everyone else's money. It's right that those who've left the RBS have done so without severance pay and that there will be no board-level bonuses in the banks where the public purse has stepped in to secure their future. But the Equality Commission and the FSA reviews will clearly need to take things further."

The Children's Secretary, Ed Balls, told the conference: "We didn't act to save the bankers – as some have claimed – but to stop the entire financial system from collapsing. And [we are] demanding, in return, new lending and a new culture of responsibility – with an end to big rewards for failure."The Communities Secretary, Hazel Blears, said: "I don't support huge bonuses for people at the top who took some pretty irresponsible decisions.What I do say is that we need a banking system in this country that does its job; that lends money for mortgages and small businesses."

Mr Cable said: "What on earth has the Government been doing since October, when it stated it would exercise discipline over bonuses as a price for using £37bn of taxpayers' money to save the banks from collapse?"

Calls for banks to adopt a culture that better reflects the new realities have been given added impetus in recent days by two developments. First, the realisation that other countries were taking a far tougher line with bank bonuses than Britain. President Obama announced that executives at US banks receiving bailout cash would have their pay capped at $500,000 and would not be allowed to pay bonuses in anything other than share options to be exercised only after the public purse has been paid back. Other countries (see panel, right) have been equally robust.

Then it was reported that two of the banks receiving huge sums of taxpayers' money intended to push through substantial bonuses to large numbers of staff before any new rules prevented such payouts. Royal Bank of Scotland, which is being propped up with £20bn of public money and is 68 per cent owned by the Government, is preparing to make payouts to thousands of senior staff. And Lloyds, which has taken £17bn in rescue money, is to pay out hundreds of millions in bonuses. Barclays, which has tapped Bank of England loans and guarantees running into billions of pounds, is also thought to be planning to pay £1.7bn to traders in Wall Street under the terms of its acquisition of part of the collapsed Lehman Brothers.

Opposition to the bonuses has been building for some time. Last week's disputes over the awarding of jobs to foreign workers were seen in part as a manifestation of the feeling in many quarters that there is one set of economic laws for the banks and another for the rest of the country. On Monday, Barclays is due to announce profits that are likely to exceed the projected figure of £5.3bn. And on Tuesday and Wednesday, a number of high-profile bankers will face the Commons Treasury Select Committee. Those who will be questioned include Sir Fred Goodwin, former chief executive of Royal Bank of Scotland, Andy Hornby, former chief executive of HBOS, plus senior executives from Barclays, Lloyds, Abbey and HSBC.

The banking industry has always been adept at making the case for the bonus culture that so thoroughly pervades it. The argument that high rewards must be paid to keep staff has receded somewhat as the quality of those hired has been found wanting. Andrew Haywood, employment lawyer at Dawsons LLP, said: "Many workers in the financial industry are grateful to still be employed."

And every day comes further economic gloom. Figures released at the end oflast week showed that manufacturing suffered its biggest quarterly slump for 35 years. Companies in liquidation rose by 52 per cent.

Another former minister, Peter Kilfoyle, said the Chancellor should clamp down on bonuses immediately. He said: "Mr Darling needs to go into these banks and leave them under no illusions that they are effectively owned by the taxpayer and they should change their attitude accordingly."

Ban the bonuses: The IoS Banks Manifesto

We demand:

* Britain's banks, especially those receiving public funds, should immediately adopt a policy of voluntary restraint, in pay and bonuses.

* If taxpayers are paying, their representatives should decide on bonuses, and any earned should be given in share options, exercisable only when public funds have been repaid.

* Failure should not be rewarded. Bonuses paid in the past year by banks bailed out by the taxpayer should be repaid now.

* At a time of widespread job losses and sacrifice, it is vital that there is a not only a widespread perception of fairness, but the reality of it too.

The payouts

Lawrence Fish Non-executive chairman, Royal Bank of Scotland

One of Britain's best-paid directors despite being rarely seen at the bank's headquarters, Mr Fish received £6.6m in salary, benefits and bonuses in 2006 and leaves the crippled bank in April with a pension worth more than £1m.

Sir Fred Goodwin 50, former chief executive of RBS

Paid £4.2m in 2007, including a £2.86m bonus. During his nine years in the top job, Sir Fred led 26 takeovers and earned £30m. Although he waived a £1.2m payoff, he still has a pension pot worth an extra £8.37m.

Peter Cummings Former head of corporate lending at HBOS

By 2007 was earning £2.6m, including a £1.8m bonus. As the head of corporate lending, he was in charge of a loan book worth £109bn. The 52-year-old took early retirement last month.

John Varley Group chief executive of Barclays

Rejected a government bailout in favour of a £7bn cash injection from the royals in Qatar and Abu Dhabi but is facing criticism as share prices continue to nosedive. Mr Varley was paid £2.42m in 2007 and a bonus of £1.425m.

Bob Diamond Outgoing chief executive of Barclays Capital Investment Bank

The investment bank saw explosive growth until it took huge hits recently from the US sub-prime mortgage crisis. In 2007 his bonus fell from £10.425m to a relatively miserly £6.5m. He has pocketed £21.3m in bonuses since 2005.

Michael Geoghegan 50, chief executive of HSBC

Took on the top job in March 2006 and is known as a 'banker's banker' who worked his way up on the unglamorous retail side. Criticised for being conservative, HSBC is now seen as prudent. He received £2.955m in 2007 and a £1.915m bonus.

View from abroad: How other countries are dealing with the issue

United States President Barack Obama has limited salaries to $500,000 at bailed-out banks.

Norway: Banking executives taking action ahead of any government-imposed cap, promising voluntarily to freeze their salaries.

Netherlands Government has taken steps to limit "golden handshakes" to one year's salary for departing banking and insurance executives who received government help.

France President Nicolas Sarkozy ruled out bonuses for bank executives benefiting from state handouts worth £9.2bn. Executives at carmaker Renault SA have done the same.

Germany Government has capped annual salaries at €500,000 and prohibited bonuses and dividend payments for senior managers at banks taking government bailout funds. Deutsche Bank will next week slash bonuses for investment bankers and others by 60 per cent.

Switzerland Banks will announce bonus cuts of up to 80 per cent when they report 2008 figures next week.

Denmark Danske Bank has scrapped bonuses for its board and severely cut those for staff.

UK Restraints on executive pay at both Royal Bank of Scotland, now 68 per cent government-owned, and Lloyds Banking Group, 43 per cent public-owned. No formal restrictions on bonuses or pay for junior bankers at either company.

Israel Bank of Israel will publish guidelines on bonuses by the end of the month.

South Korea Executives voluntarily cutting salaries and bonuses. No government restrictions have been imposed.

Russia Salary caps for executives being discussed.