Barclays (LSE: BARC) (NYSE: BCS.US) is set to reveal its preliminary results for 2013 on Tuesday and we’re expected to see an increase in the amount it pays to investment bankers in bonuses. This will likely be a higher proportion of revenues than the 39% — or £1.3 billion — last year. A figure close to £2.5 billion has been speculated.
Barclays chief executive, Antony Jenkins, views huge bonuses as the cost of running a major investment bank. Essentially, he argues that to work in the industry you have to accept the pay structure along with it. This is, according to Mr Jenkins, in the interests of shareholders.
The issue of bonuses is one that has generated much public anger: why are these bankers, whose reckless behaviour played a major role in the financial crisis, being remunerated while times are austere for everyone else?
Bonus culture in brief
Firstly, why do banks pay so much in bonuses?
Basically, it’s the market rate. If a bank cuts pay and bonuses it wouldn’t be able to recruit — or retain — the staff needed to thrive. Barclays is worried that as a result of a looming EU cap on bankers’ pay that the best performers will be lured elsewhere, to the likes of JP Morgan or Goldman Sachs in America.
Barclays is finding ways to get round the bonus cap, which limits bonuses to the same amount as annual salaries, or twice as much if shareholders approve. In a revamped bonus scheme shares will be paid to senior executives instead of cash, alongside their salaries and benefits.
The alternative would be to increase salaries, but this would only over-inflate the wage bill and eat into margins. Bonuses, on the other hand, allow for more flexibility, especially in a down market.
How this is good for Barclays
Giving out shares as bonuses is a prudent way of doing things. Paying with cash depletes a bank’s capital — which is there to provide some protection against losses. During the financial crisis, Barclays managed to keep paying a dividend. There’s even more of a buffer this way so your dividend shouldn’t come under threat, which makes the stock attractive.
Additionally, if a banker is paid in shares then they should be more greatly concerned with the future prosperity of the bank. Were we to see another lending bubble — like the one of 2006 — then the shares would burst in tow. This way, as the fortunes of the bank go from strength to strength, so does the workers’ wealth.
There’s a vested interest here, which works in shareholders’ favour, as well.
