Analysis: Banks in bonus balancing act as economies shrink but markets boom

Popular

26/08/2020 07:00

* Majority of finance firms keeping bonus plans intact for
now
    * Average salary increases for new hires falling instead
    * Bonus opportunities abound for staff who hit ESG goals

    By Sinead Cruise
    LONDON, Aug 26 (Reuters) - Major international banks may
still pay out big bonuses to high flyers this year even as the
pandemic saps the global economy, as fears of losing talent to
rivals during a trading boom trump worries of a big compensation
bill.
    While the likes of HSBC  HSBC.L  and Deutsche Bank
 DBKGn.DE  are making redundancies to trim costs, other banks
are taking a more relaxed approach to job, salary and bonus cuts
across their workforces, remuneration consultants say.
    A poll in June of 75 financial firms by Pearl Meyer, a
global remuneration consultant, showed 63% have neither made nor
contemplated changes to bonus structures in the face of the
pandemic, even though 70% expect COVID-19 to have a moderately
or slightly negative impact on their businesses.
    Bonus plans also come despite a regulatory frown in Britain
and elsewhere on bumper cash payouts in the early days of the
pandemic, as banks were urged to conserve capital.    
    "These banks move broadly in lockstep, no one wants to cut
anything first," said Simon Patterson, managing director at
Pearl Meyer, which advises more than 1,000 companies on employee
compensation structures annually.
    Sources at two global banks said it was too early to
speculate on bonus outcomes for specific units, though many
traders will expect big payouts after a surge in revenue at
market divisions propped up investment bank profits in the first
half of the year.
    Research from compensation consultant Johnson Associates
this month suggested 2020 bonuses for fixed-income traders for
instance could rise by more than 30% from last year.
    But that will need to be balanced against performances in
other units, with low interest rates and an expected rise in
defaults set to hit earnings in retail and corporate banking.
    "Financial markets are cyclical but what we face is so
unprecedented, no one truly knows whether next year is a feast
or famine," Patterson said.
     
    EXTREME MODERATION 
    Britain's Prudential Regulation Authority (PRA) banned bonus
payments to top management and material risk takers at the UK's
biggest deposit-taking banks when Europe's COVID-19 crisis
escalated in March, meaning some top traders could miss out.
    Some senior managers at Barclays  BARC.L , Lloyds Banking
Group  LLOY.L  and NatWest Group  NWG.L  waived scheduled pay
rises and took voluntary salary cuts.           
    But the PRA has not made clear how long the ban will stay in
place and some banks are already planning for future payouts,
the Financial Conduct Authority (FCA) noted last month, though
it urged them to align payouts with long-term business plans. 
    The PRA said it will reassess firms' distribution plans
beyond 2020 in the fourth quarter. 
    Its assessment will be based on the current and projected
capital positions of the banks and will take into account the
level of economic uncertainty and market conditions at that
time. 
    The European Central Bank said last month that EU-regulated
firms must "adopt extreme moderation with regard to variable
remuneration payments until 1 January 2021", though this
restriction ends before most EU lenders set bonuses for 2020. 
    Longer-term, it encouraged banks to consider whether a
larger part of variable pay could be deferred for longer or paid
in other instruments rather than cash. 
    A source at a major global bank said firms were reluctant to
dismantle bonus structures, because doing so could deter bright
graduates from applying for entry-level roles and demotivate
existing staff needed to power the business through tough times.
    There may however be pressure to adapt their models, in a
bid to keep costs in check and avoid a backlash over huge
payouts during a recession.
    
    HAZARD BONUSES 
    Some are reducing the amount paid to new hires. Data from
recruitment consultant Morgan McKinley showed the average salary
rise for those moving from one UK finance job to another dropped
to 15% in the first half of 2020 compared with 19.8% a year
before.     
    In the United States, some banks including Popular Inc
 BPOP.O  and Associated Banc Corp have already said they will
pay front-line employees more money in the form of "hazard
bonuses" during the pandemic.
    Other banks are offering non-financial rewards like extra
holiday leave and other benefits to make staff feel both valued
and wealthier, at little or no impact to their bottom lines, the
remuneration consultants said.
    Justine Woolf, director of consulting at UK-based Innecto
Reward Consulting, said banks were also looking to increase
bonuses to staff who helped them hit certain environmental,
social and governance goals, so that payouts were more aligned
with good corporate behaviour. 
    "Banks want to be seen to be doing the right thing," Woolf
said. "That includes increasing diversity and creating a better
gender profile, and bonus plans are being tweaked to incentivise
managers to achieve this".
    But top risk-takers and executives were less willing to
surrender the chance to take home big bonuses, she said, leading
some employers to consider awarding restricted stock to appease
those who could yet miss out because of regulation.
    "Bankers know the score," said Pearl Meyer's Patterson.
"Some years they are overpaid, some years they are underpaid.
It's never like Goldilock's porridge."  

 (Reporting by Sinead Cruise; Editing by David Holmes)
 ((sinead.cruise@thomsonreuters.com; 020 7542 5154; Reuters
Messaging: sinead.cruise.thomsonreuters.com@reuters.net))