Remuneration and risk: how much has changed post-crisis?

Written by James Thomas on Thursday September 27, 2012

The ongoing financial downturn in the UK has served to keep the issue of financial sector remuneration firmly in the spotlight. And there’s a feeling in many quarters that not much has changed since the crisis: that many within the sector are overpaid, and that the sector’s contribution towards the current economic downturn has not been properly reflected in the remuneration of those within it. Indeed, speaking to the Treasury Select Committee earlier this year, Dick Saunders, chief executive of the Investment Managers' Association, suggested that: "Expectations about earnings within the financial sector are wildly out of line with most other sectors of the economy – and that's a cultural issue.”

As the public sector pay freeze continues to stir up discontent, recently released figures from the Office for National Statistics (ONS) will do little to shake the popular perception that financial sector workers are enjoying the life of Riley.

According to the ONS, for the financial year 2011/12, those in finance and insurance received total bonuses of £13bn (or £12,000 per employee). Although this was down 9% on the previous year, it still works out as 36% of the total UK bonus pool, despite the fact that the sector employs only 4% of the UK workforce. The figures also showed that the bonuses paid to employees of the nationalised banks had the effect of tripling average public sector bonuses to £300.

Direct comparisons between public and private sector pay are not straightforward, as the ONS was keen to stress: “private sector workers on average get lower regular pay than people working in the public sector, with bonus payments being a more significant part of total pay in the private sector.” Nevertheless, the average bonus (per employee) for the private sector as a whole was £1,700, a fraction of that enjoyed by those in finance. On top of this, research suggests that regulatory reform to reduce bonuses in the financial sector has in fact resulted in higher basic salaries. For example, a study by the Association for Financial Markets in Europe shows that investment bankers’ basic salaries have increased by 37% over the last four years (although their total remuneration has declined).

Related to the issue of remuneration is that of accountability. Underlying the view that the rewards received by those in finance don’t capture the role they played within the crisis is an overriding sense that that role itself remains under-acknowledged. A recent study by the Economist Intelligence Unit highlights the differences of opinion between those within and outside the industry on this key issue. Over half (58%) of investment bank bosses surveyed believed that anger over pay levels was “unfair”, and only 34% saw themselves as “highly accountable to society at large”.

Tellingly, these attitudes apparently carry over into investment bankers‘ approach to risk, with only a third suggesting that public and investor anger had influenced their risk appetite and 84% reporting that their focus was on short-term performance targets.

So despite the issue of pay being ever-present within the media over the last four years, how much has really changed?