Lorna Ashworth: There’s still some value in a bank bonus system

EUROPE’S recent tougher stance on bankers’ pay, which could see bonuses capped to 100 per cent base salaries, may be welcomed by many but I believe an opportunity is being missed to address the key issue behind bonuses – affordability.

“Bonus” has become a dirty word, especially in the context of the banking sector which has traditionally paid the highest bonuses. Whether it’s the money on offer or the perception that failure is being rewarded, the bonus bonanza will continue to generate public and private hostility.

Rather than react by removing bonuses altogether, we need to fix what seems to be a broken system, applying reason, justification and consideration. Self-funded bonuses would be a welcome solution. By defining the link between performance, affordability and the level of bonus paid, the process would be transparent.

The recent European Banking Authority (EBA) survey makes shocking reading, revealing huge disparities in bonus ratios to fixed salary from bank to bank and country to country. The average bonus ratio varied between roles from 122 per cent for executives and 139 per cent for traders in some countries, up to 940 per cent in others.

Let’s not forget that much of this money is paid out by institutions whose performance is failing and whose bonus systems are clearly not fit for purpose.

But there is another hidden danger to this European plan. Rather than create a more transparent system, we could see the banking sector come under pressure to provide pay and rewards in other ways, not just bonuses.

No executive is going to accept an overall package drop. They could well argue they need a higher salary base rate or enhanced benefits package to retain the level of their existing overall package value. If one institution goes down that route, others will follow as they try to attract the best bankers.

The industry must change but in taking a tougher stance, we must be careful in dealing with one problem not to create a new one that might be harder to deal with in future.

• Lorna Ashworth is managing director of Ashworth Black.