When times are good in financial markets, bankers get colossal bonuses. When things go badly? Bankers still live well off the fat. Many can cash in and check out, leaving taxpayers to pay for the mess. Banker bonuses were cast as one of the root causes of the 2008 global financial crisis, the heart of an incentive system that rewarded greed and excessive risk. Years later, bonus payments for bankers remain a prickly topic for banks and politicians. As the European Union rolls out the first law limiting payouts, there’s a race to find loopholes and a debate about whether regulators should interfere with how much bankers earn.
Bonuses shrank as banks adjusted to a post-bailout reality of lower profits and trading revenue. Industry bellwethers like Goldman Sachs and JPMorgan cut the share of revenue set aside for payouts, which were often several times base salary and took total compensation well over $1 million for thousands of top performers in the industry. Many banks also changed the structure of pay to reward longer-term success, deferring more compensation and in some cases paying in bonds as well as in stock and cash. Regulators want more clawbacks, which allow bonuses to be recouped if investments go sour or wrongdoing is later discovered. EU banks face tougher rules than their U.S. counterparts. Over objections from the U.K., Brussels-based lawmakers banned bonuses of more than twice fixed salaries starting in 2015 (for performance this year). The law applies to the worldwide operations of EU banks as well as local operations of global firms. Banks are trying to sidestep the cap by giving certain managers allowances in addition to their salary and bonus, a maneuver that may be restricted by regulators. Meanwhile, Wall Street bonuses are rising again and high-earning traders are fleeing to less-regulated hedge funds and private-equity firms where they can still earn the big bucks.
Bonuses began their climb in the 1980s, when deregulation allowed commercial banks to expand into more stock and bond trading and boost profits by buying and selling with the bank’s own money. Eat-what-you-kill traditions meant professionals reaped bonuses in line with the profit they generated. Top bankers argued that their skills made them as valuable as professional athletes. When risky investments blew up during the crisis and banks were deemed too big to fail without harming the financial system, the moral hazard of bonuses was exposed. Lenders that took taxpayer money to stay afloat were forced to slash payments to top executives as protests like Occupy Wall Street focused on the issue. U.S. banks faced less scrutiny after repaying the government and leaving the jurisdiction of Kenneth Feinberg, the Obama administration’s former pay master. The U.S. adopted the Volcker Rule to ban speculation at federally insured banks, though a proposal on bonuses stalled. A series of high-profile legal settlements in the U.S. and U.K. hasn’t done much to improve the public’s view of bankers, as lenders were fined for violating sanctions, manipulating benchmark rates and selling customers insurance they didn’t need.
Politicians are tapping into a simmering public outrage about the behavior of bankers, along with broader concerns among voters about the economy and income inequality. U.S. President Barack Obama said in July that dismantling their incentives was an “unfinished piece of business.” Many financial professionals say that banker-bashing has gone on long enough, and that firms have changed the way they operate and structure pay. They say the EU caps are a crude way to control pay and may drive base salaries higher. The hard-and-fast rules leave European banks at a disadvantage to their peers in New York or Tokyo, and the U.K. in particular has a vested interest in a more flexible approach so that London can remain a top city for global finance. Banks including Barclays have complained about the rules, arguing that firms need to be able to pay competitively to retain critical talent.