When times are good in financial markets, bankers get colossal bonuses. When things go badly? Bankers still live well off the fat. Bonuses can often reach several times base salary and take annual compensation well over $1 million for thousands of top performers. 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 a European Union law caps payouts, there’s still a debate about whether regulators should interfere with how much bankers earn.
Banker bonuses tumbled after the financial crisis, and while they're on the rise again in some areas, they've not returned to their peak. 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 still want more clawbacks, which allow bonuses to be recouped if investments go sour or wrongdoing is later discovered. EU banks live under a tougher regime. Brussels-based lawmakers banned bonuses of more than twice fixed salaries starting in 2015. The law applies to the worldwide operations of EU banks as well as local operations of global firms. Banks tried to sidestep the cap by giving certain managers allowances in addition to their salary and bonus, though regulators closed the loophole. Banks say the EU rules are a crude way to control pay and have driven base salaries higher. The U.K., which fought the EU rule, is likely to scrap the bonus cap once Britain leaves the bloc in 2019. A U.S. push to enact sweeping new limits on banker pay -- one of the last major planks of the 2010 Dodd-Frank Act -- halted after President Donald Trump took office.
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. While U.S. banks faced less scrutiny after repaying the government and leaving the jurisdiction of Kenneth Feinberg, the government's pay master, protests like Occupy Wall Street kept focus on the issue. The U.S. adopted the Volcker Rule to limit speculation at federally insured banks, though the proposal on bonuses wasn't completed. 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 income inequality. U.S. President Barack Obama said in 2014 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 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 Plc have complained about the rules, arguing that firms need to be able to pay competitively to retain critical talent.
The Reference Shelf
- A QuickTake on Deutsche Bank's bonus puzzle.
- Glassdoor, a website used by bankers and other professionals to gauge compensation.
- A July 2013 report from the European Banking Authority on remuneration at EU banks.
- A roundup of coverage of the Occupy Wall Street movement in the New York Times.
First published Aug. 5, 2014
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Leah Harrison at email@example.com