Hector Sants: new bonus policy.

It seems that one of the consequences of the Financial Services Authority’s forthcoming new policy on executive bonus payments is that firms are hiking basic pay – particularly on the sell side of investment banks servicing fund management groups – in response to the call to keep bonus payments in check.

Salaries tripled

Anecdotal evidence from Citywire.co.uk suggests that, in some instances, basic salaries have tripled in investment banks or in organisations which fear losing staff to the banks.

Where previously, sell-side analysts might have been on a relatively low basic – say, £150k – they would also have been able to earn several times this in bonus payments. However, the FSA is calling for firms to be able to work a ‘flexible bonus policy’ and that means basic salaries have to be high enough to allow companies to vary bonuses or cut them altogether in lean years.

Unreasonable risk

FSA chief executive officer Hector Sants has publicly stated this week that massive bonuses have the potential to ‘incentivise people to take unreasonable risk’ and to pay out so much money that they destabilised the institution itself. He also acknowledged that massive bonus payments could be considered unreasonable at a time when obviously the state sector – the taxpayer – is supporting large parts of the banking sector.

Sants has emphasised that the watchdog would not allow any ‘new’ multi-year guaranteed bonus payments to be made, so what is happening in the City? Firms decided to entrench the earnings of investment bankers with stella salaries instead – a move guaranteed to make the link between remuneration and sustainable, long-term performance even more remote.

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