Government levy on banks rises as it seeks deal on bankers' bonuses

The Government is to increase the levy on banks to 2.5bn this year, as it pushes for a deal on limiting bankers' bonuses.

Chancellor George Osborne said the new, permanent levy would this year raise an extra £800 million more than the Government had originally planned. In addition, Osborne is to make the levy a permanent feature, rather than a one-off. Today’s announcement has been brought forward from next month’s Budget in order that banks understood the context they were operating in before announcing bonuses, Osborne said.

Banks will begin to announce the value of their bonus pots next week. Total payouts are expected to top £6 billion.

The chancellor has been trying since October to tie down a deal with banks to limit bonus payments as part of Project Merlin, the negotiations between government and the banks on lending, pay and transparency.

Osborne told Radio 4’s Today programme this morning that he understood people’s anger over bonuses.

"It would have been better if, when we were bailing the banks out, we had secured something from the banks in return. Unfortunately, I was not chancellor at the time," he said.

Meanwhile, research from global consultancy Mercer finds that 30% of financial organisations across western Europe expect a higher bonus pool in 2011. Typically, a bonus pool is determined by corporate or divisional performance or a combination of both.

Mercer’s annual Pan-European Financial Services Executive Remuneration Survey provides base pay and bonus data for senior executive-level positions. Data is compiled from 38 leading insurance, banking and financial services organisations across western Europe.

The survey shows that almost all financial services firms have made changes to their compensation schemes and performance measures in the past two years. A third of organisations plan to adjust or introduce clawback arrangements with a malus-type bonus arrangement in 2011. This is where a major portion of an employee’s bonus is not immediately available and can be reduced if there are losses or if business indicators fall substantially during a multi-year deferral period.

"Executive compensation and remuneration committees have endured another year of strong focus and scrutiny by their stakeholders," commented Vicki Elliott, partner leading Mercer’s rewards consulting in the financial services industry.

"Our data shows that corporate governance processes have been strengthened and pay structures have evolved since 2008. The widespread salary freezes and salary cuts for executives have come to an end and most organisations have gone back to regular salary reviews," she added.

The vast majority of financial services companies will increase salaries this year. Internal risk and audit positions have seen the greatest increase in salaries, while pay on the whole has continued to move away from short-term incentives.

The proportion of long-term incentives in CEOs’ total compensation rose from 36% in 2008 to 46% in 2010, while annual bonuses have dropped from 39% in 2008 to 23% in 2010, said Mercer.