Investment banks are exploiting gaps in global pay reforms to persist with some of their most contentious practices, including guaranteeing lucrative bonuses to employees regardless of their performance, industry data show.
Guaranteed bonuses to new hires accounted for 8.5 per cent of the average bonus pool for 2010 at 51 top financial institutions, according to a study published by the Institute of International Finance (IIF), an industry lobby group.
That is up sharply from 5.5 per cent in 2009, at the height of public outrage over bankers’ pay, and 7.1 per cent in 2007, just prior to the financial crisis.
The IIF withdrew its report shortly ahead of publication after saying it had yet to receive the full approval of the IIF’s board, which is chaired by Josef Ackermann, Deutsche Bank’s chief executive, and includes several of the industry’s most prominent figures. The survey, which was conducted for the IIF by Oliver Wyman, the management consultancy, was re-issued on Thursday afternoon.
Guaranteed bonuses, which offer employees a fixed payment at the end of the year regardless of their own performance or business profitability, are one of the most controversial elements of banks’ pay structures. Regulators have warned that they sever the link between performance and reward, potentially impairing risk management.
The Group of 20 nations agreed to bar guarantees that last for more than one year as part of a number of reforms introduced across the industry in 2009. Guarantees to new hires are allowed only in “exceptional” circumstances, for their first year of service.
However, George Abed, a senior manager at the IIF, said the survey indicated that some banks are now using single-year guarantees to skirt tighter restrictions. “It’s a way of sort of going along with the text of the law, in terms of multi-year bonuses, but trying to get around it in some cases,” Mr Abed told the Financial Times.
Several bankers said that big guarantees became more prevalent in 2010 as leading investment banks boosted headcount in anticipation of a stronger recovery. Barclays, for example, added 1,600 investment banking staff during the year; UBS, the Swiss group, added 1,200.
Most leading banks also significantly increased fixed salaries, in part to compensate employees’ for the impact of reforms that require a larger proportion of bonuses to be paid out in shares and over several years.
The IIF report reveals that 60 per cent of the 51 institutions surveyed increased the salaries of bankers and traders in 2010, with further increases expected in 2011 at 27 per cent of those banks.
A sharp downturn in the markets has since forced many to pull back; more than 100,000 job cuts have been announced in recent months across the industry.
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