Cabinet minister Peter Hain made headlines earlier this month when he recommended that City firms donate two-thirds of their bonus pots to charity and inner-city regeneration.
City bonus payments frequently cause controversy, not least because of the telephone-number length figures involved. Investment bank Goldman Sachs this year set aside £8.5bn for salaries, bonuses and benefits, translating to an average £320,000 for each employee.
But it’s not just the City that likes to use bonuses as an incentive. This month, the Chartered Institute of Personnel and Development (CIPD) published its annual survey of UK reward management. Of those employers without existing bonus or incentive arrangements, 16% will be introducing one for the first time.
Charles Cotton, pay and rewards adviser for the CIPD, says: “In the City, it’s relatively easy to get an idea of performance through seeing how much money each person has generated for the company. If this system was transferred to, say, the public sector, that sector tends to be the recipient of funds rather than a generator.”
But one reason why City bonuses in particular attract so much criticism is that they are often shrouded in mystery, as a spokesperson from an investment bank points out. “City bonuses are very bespoke and secretive. Although they are performance-related, one division of the company may have had a profitable year, and so will be rewarded more than the others. A lot depends on market fluctuations and banks are very short-termist in their outlook, and will hire and fire people according to which division is having a good year.”
In light of high bonuses and executive salaries, the Work Foundation has proposed forming a ‘high pay commission’ to advise boards on reward. Its report The Risk Myth says of executives’ rewards: “Talent is narrowly defined and then sought in the form of an arms race where competition rises regardless of the normal economic rules of governing efficiency and effectiveness.”
Cotton adds that bonus systems often reflect the culture of the organisation. The City may have controversial ‘fat-cat’ bonuses, he says, but its workers also have the culture to go with it.
They will stay in the office overnight and at weekends to get a project done, and the pressures of work can be high. This goes hand-in-hand with a generous reward system.
But this won’t work in every company. Last month’s suggestion by Manchester United chief executive David Gill that football clubs should lower players’ salaries and introduce City-style bonuses just wouldn’t work, says Cotton.
“It’s important to encourage team playing in football,” he says. “You wouldn’t want one individual hogging the ball simply to get his bonus.”
US investment bank Lehman Brothers paid staff a total of $8.7bn in salary, bonuses and other benefits last year.
PartyGaming, the internet poker site, last year rewarded its chief executive Mitch Garber a £2m cash payment, £3m in cash over three years, and 15 million in new share grants.
This January saw four top executives at US company Premier Oil share £2m as part of a £14m long-term incentive plan.
By Zoe Grainge