In Britain, the big bonus rises again

It's a bumper year for bonuses at Goldman Sachs. The new boss of Britain's Royal Bank of Scotland is looking at an eight-figure package. And big rewards await traders at Barclays.

No, it's not a news flash from the precrisis years of giddy exuberance and yachts for everyone. From the depths of recession, parts of the financial world are feeling perky again. And that means: The bonus is back.

That's good news if you're a Goldman trader anticipating a six-figure payout on the back of some extraordinary quarterly results. Or if you're Stephen Hester, appointed chief executive of the taxpayer-owned RBS, with a seven-figure share option arrangement.

But there is growing consternation at the sudden reemergence of a bonus culture that arguably encouraged the cavalier attitude toward risk that led to last autumn's withering financial crisis.

Lawmakers have attacked the government for shirking promises to rebuild the financial world along more responsible lines. Unions are furious that, while tens of thousands continue to lose their jobs, those at the top can still expect to find fat pay figures.

"It is very alarming," says Norman Lamb, an opposition Liberal Democrat member of Parliament. "Lessons have not been learned from the dire experience we have been through. We need a shift of culture that rewards long-term progress, not short-term gain."

Not just big-bonus-business as usual

Yet the picture is somewhat more complicated than a simple return to big-bonus-business as usual.

One survey this week by Income Data Services found that bonuses across the board had fallen by a quarter in the year to April. Some bankers insist the mood is still somber.

"Most people are more concerned about staying in their jobs," says one banker with a big international firm who did not want to give her name. "The sort of astronomical bonuses go to a tiny percentage of people in a business. And there will generally be a correlation between the figure and the amount generated for the employer."

Still, a certain disappointment lingers that the government and its regulator, the Financial Services Authority, have not prevented the extravagant bonuses that encourage recklessness.

Mr. Hester will get a bonus of around £6 million ($10 million) if he can double the RBS share price within the next three years – an arrangement seen as encouraging the adventurism that resulted in RBS and three other banks collapsing into state hands in the past 18 months.

Government touch too light?

Chancellor Alastair Darling has rejected imposing the kind of caps favored by US President Barack Obama. Instead, he has adopted a more delicate approach. First is a new financial code of conduct, to come into force at year's end, that will forbid reckless bonus guarantees and require remuneration to reflect performance. Firms that do not comply could face sanctions. Mr. Darling is also considering the recommendations of an inquiry that last week advocated that bonuses be delayed by several years, and that remuneration packages be published in annual reports.

Darling's light touch may stem from the fact that financial services account for more than 1 in 30 jobs in Britain – a million employees. Over the past decade, the sector has generated £250 billion ($410 billion) of tax revenues. The government cannot afford to lose tax revenue or jobs by driving business overseas.

But critics say those arguments merely point to the cozy relationship between the government and the City, or London's financial district. "The authorities have been too reluctant to deal with this," says Mr. Lamb.

Tougher approaches suggested

Several tougher approaches have been suggested to shift bonuses toward rewarding long-term performance.

Justin Urquhart-Stewart, a seasoned observer of the City, says regulators need to "hit companies where it hurts."

"You need to say that if you take short-term risks then your cost of capital will be higher," he says. "Merely saying people can't be given bonuses of X would be wrong because they would find other ways to go about it."

France has said it will limit share options in companies receiving state support and ban bonuses that are not linked to set targets. European regulators want measures that would peg bonuses to long-term performance and allow boards to claw back money already paid.

Professor Cuthbertson says he would like to see Britain set up an institution that would look into pay schemes independently of government, regulator, and the City.

"Unless they get tough, we will have a repeat" of the crisis, he says.