Banks need to respond to the radically changed bonus payout guidelines in the New Year. Traditionally bonuses have been linked to the profitability and stock market performance every year. However, new guidelines suggest that going forward bonuses will be linked to customer satisfaction and capital creation.
The major banks including HSBC, Lloyds Banking Group, Barclays and Royal Bank of Scotland have already initiated discussions with key investors on deciding performance parameters to be taken into consideration.
The proposed changes are being driven by the FSA, which wants more transparency in the way banks pay their executives and associated risks managers assume for the returns on investments.
New guidelines became effective from Jan 1 in the European Union have set new benchmarks based on which long term bonuses should be calculated. However, senior bankers have appealed to the authorities for guidance about bonuses due to be paid out for the year 2010 in view of all new guidelines.
The major banks have already approached the Chancellor – George Osborne and Business Secretary Vince Cable and have requested precise guidelines about what sort of payouts will be acceptable to the government.
Bankers and finance departments will finalise bonuses to be paid out by the end of the month for the year 2010. However, it is understood that numerous guidelines have made the process difficult. City bankers are said to be receiving £7 billion in bonuses over the next two months. This may raise a political storm as small businesses struggle to secure bank loans and consumers feel the squeeze of inflation and tight financial conditions.
UK’s heads of the five largest banks have already engaged in discussions with Mr. Cable and Mr. Osborne about possible payout cuts, apart from the applicable EU and FSA mandated cuts.
In a new development, charities have demanded imposition of taxes on banker’s bonuses in order to insulate themselves from proposed government aid cuts.
The government plans to raise £2.6 billion in fresh taxes on banks in 2012.