Big bonuses keep us competitive, says Barclays

Barclays’ and RBS’ desire to increase bonuses when bank profits have declined will lead to a weakening of the banks’ financial stability, according to Warwick Business School professor of financial economics John Thanassoulis.

“But Barclays felt they had no choice,” Mr Thanassoulis said.

“Barclays chairman Sir David Walker noted at the AGM that Barclays’ business was targeted aggressively by competitors keen to poach Barclays’ best staff,” he said.

“RBS also said they had to pay more if they were to remain competitive.”

Barclays’ decision to pay higher bonuses comes after a dramatic shareholder revolt led by Standard Life, one of the bank’s largest institutional investors.
Competitors on both sides of the Atlantic have aggressively attacked Barclays’ firm decision to increase banker bonuses.

Meanwhile, the bank left its dividend unchanged and had tapped investors for £5.8 billion (approximately $10.5 billion) in a rights issue last October, the Financial Times reported last week.

The increased bonus pool at Barclays alone, most of which is earmarked for investment bankers, is equivalent to 1.7 per cent of the investment bank’s risk-weighted assets.

“To put this into perspective, the global response to the financial crisis has been to increase the proportion of risk-weighted assets funded by safe equity capital by a similar proportion,” professor Thanassoulis said.

“Barclays and RBS are both victims of a system of high pay levels that lead to financial instability as banks over-reach themselves to hire those they think can bring in extra business or generate higher returns,” he said.

New research from Warwick Business School studies the aggressive poaching that is the key driver of high bankers’ pay.

Professor Thanassoulis proposes that a cap on total remuneration for investment bankers in proportion to risk-weighted assets applied to all banks would contribute significantly to financial stability.

“The pay revolt at Barclays highlights that the unfettered system of pay competition is bad for shareholders and is bad for financial stability,” he said.