For once, it’s not bankers who are in the firing line when it comes to eye-watering bonuses. Recently, Jeff Fairburn, the chief executive of house builder Persimmon was given a bonus of £110 million. Critics, however, have said the sum was excessive and even “obscene” with some describing it as “corporate looting”. But, is paying what appears to be an excessive amount creating risk and how should risk managers recommend bonus schemes are structured?
Persimmon’s £500m scheme
The Persimmon scheme is believed to involve the most generous ever payouts in the UK and will result in over £500 million to an elite group of 140 senior staff. But, the outcry would suggest that more caution perhaps should have been exercised and two heads have rolled. Notably, the company’s chairman and the chair of the remuneration committee have resigned, taking responsibility for not putting a cap on the bonus scheme. Further, Fairburn has since sought to pull away from the furore by saying the scheme was set up before he joined, that he never sought such a large payment and that he plans to set up a charitable trust in order to allow donations to good causes, although these have not been specified.
Time will tell if there will be lasting impact on Persimmon, but the fact remains, there has been a great deal of negative publicity and many shareholders are angry. However, in contrast, it is notable that banks and the wider financial services sector have remained out of the limelight. So, why is this?
Behind the financial crisis
Certainly, in part, it‘s down to the influence of the Financial Conduct Authority. The bonus culture was viewed as having played a major role in the financial crisis of 2008-2009 and while the regulator cannot lay down prescriptive views on how firms remunerate their staff, it has said it favours stock option plans to create a better link between pay and performance.
Further, the Senior Managers Regime, which came into force in 2016, ensures those in positions of responsibility must monitor the actions of more junior staff who could be involved in risk-taking activities. The regulator is also known to be keen to discourage firms from basing pay largely on commission, setting extreme payments for hitting targets and encouraging product bias. Last summer, Jonathan Davidson, the FCA’s executive director of supervision, said: “The way firms pay and manage the performance of their staff is a key driver of culture and customer outcomes and a continuing priority for the FCA. We expect firms to understand the effects their staff incentives might be having.”
Bucking the trend
Meanwhile, it is becoming more usual to find examples of restraint, or even no bonuses being paid, such as:
- HSBC changing its bonus structure for back-office staff, such as those in compliance, legal and IT. The amount is capped at two and a half months’ salary and the amount received varies from the full amount to nothing, based on performance and behaviour ratings. The bank describes the new system as “simple, fairer and more transparent”.
- Sweden’s Handelsbanken is expanding in the UK but it does not pay bonuses, pay is almost all fixed, is not tied to sales targets and the bank’s incentive plan only pays out when employee turns 60.
- Allied Irish Bank is not allowed to pay bonuses, because since it was bailed out by taxpayers, this would break its agreement with the Irish government. However, this has not affected performance as the bank has recently been though a highly successful IPO and has a valuation of €12 billion.
Of course, bonuses within financial services remain, but overall, there is more restraint. A gradual shift is occurring, no doubt influenced by regulatory attention. Many within investment banking, among others, continue to do very well out of their bonuses, but risk managers may also be feeling a little more encouraged that they will be less damaging than in the past.