HM Treasury today revealed significant restructuring plans for state-aided banks RBS and Lloyds as well as future proposals for Government fiscal aid. Part of those included rules that demand that both banks will not to pay 2009 cash bonuses to any staff earning above £39,000 and executive members of both boards will defer all bonuses payments due for 2009 until 2012.
Mumford believes the Government may be forced to enforce the bonus freeze imposed on RBS and Lloyds Banking Group across the whole sector to avoid a mass exodus of the banks’ staff.
He says: “The question the market may want to consider is whether or not the rest of the banking sector could be in for similar restrictions on cash bonuses, on the grounds that the remaining banks are now in a highly competitive position for attracting staff from their taxpayer-funded rivals.
“If it was perceived to create an unfair market advantage, we may find more surprises in store on the issue of bonuses, with limits introduced across the entire banking sector so as to even the playing field.”
But Mumford warns this is an almost impossible task: “The international face of the banking system is such that it would be all but unworkable to hammer the sector at large through the legislative system, or through regulatory or taxation measures. An international agreement would be required across key world markets, although the full force of such a policy would still be tempered by the position of offshore havens reluctant to play ball.”
He also questions the perceived notion that share bonuses rather than cash lead to long-term goals and commitment from staff: “While share bonuses may fit the current political mood, it is worth remembering that the biggest faller from the financial world-stage – Lehman Brothers – famously rewarded its staff with all-share bonuses.
“The reality is that heady amounts of paper can cause asset bubbles in a share price and equally encourage individuals to take on unacceptable levels of risk.”
CMS Cameron McKenna head of employee incentives Nicholas Stretch says: “The potential difficulty with this proposal is that UK investor guidelines have limited the number of shares that can be used for employee purposes to 10 per cent over a 10-year period. Although some banks have had massive share capital increases recently and so will be able to accommodate the extra pressure on their share capital, not all may be able to without getting special permission from shareholders.”