Eight years after the collapse of Lehman Brothers sparked a global financial crisis, the spread of Britain’s bonus culture from the bankers of the City to the hi-tech start-ups of London’s Shoreditch has seen pay top-ups leap to a new record level.
While regular pay growth has remained modest for most UK workers, generous bonuses at firms outside the financial sector have pushed bonuses above their previous pre-financial crisis peak.
Total bonus payouts in the year to the end of March rose 4.4% to £44.3bn, according to Office for National Statistics (ONS) figures – with the biggest cash payments still going to the financial services sector.
The total in cash terms beat the record of £42.5bn that had stood for the past eight years – and threatens to reignite controversy about how key staff are remunerated.
Frances O’Grady, the general secretary of the TUC, said: “UK workers have suffered the biggest fall in wages of any developed country apart from Greece. They are still paying the price for the financial crash. For millions of hard-pressed families, these figures will just add fresh salt to the wounds.
“Theresa May says she wants a Britain that works for the many, not just the privileged few. What better way to show she means business than by clamping down on mega bonuses and excessive pay at the top.”
The new prime minister has made tackling inequality a key pledge after the Brexit vote highlighted the scale of public anger at the growing gap between rich and poor.
May has promised to “reform capitalism so that it works for everyone, not just the privileged few” and also criticised fat cat pay. The new prime minister wants companies to publish the ratio between the chief executive’s pay and the average company worker’s pay, and it has emerged that the powerful Commons business committee will on Friday launch a wide-ranging inquiry into the make-up of company boards and executive pay.
Latest official figures show that regular earnings growth has slowed since the EU referendum and in a sign of continued insecurity in the workplace. Earlier this month new data also showed there has been a 20% rise in the number of people employed on zero-hour contracts, to 900,000, over the last year.
Stefan Stern, director of the High Pay Centre said bonuses had their uses but must be handled with care and he highlighted the return to levels last seen when the financial crisis struck in 2008.
“On the one hand, you could see why some employers would want to recognise people and reward them and say ‘We are through the worst of it’. But on the other hand, there’s a worry that bad habits could return … I think small bonuses are perhaps a good idea but big bonuses are potentially very dangerous if they encourage people to take excessive risks.”
David Hillman, with the Robin Hood Tax campaign, said: “Once again these figures show that financial sector bonuses are way out of kilter with the rest of the economy. There is a long way to go before the excess of the City is curbed and this huge gulf in rewards between bankers and the public sector is addressed.”
The City’s annual bonus round was a feature of the boom years in the early part of the 2000s, but the credit crunch, job losses and a clampdown on some of the riskier activities produced a sharp reduction in the payouts made by banks and other financial companies. The EU also introduced rules designed to limit City bonuses, although the rules actually resulted in many workers demanding higher basic pay.
But bonus payments have gradually picked up again.
The ONS data shows that finance and insurance remained the biggest contributor to the total. Employers in the sector handed out bonuses of £13.9bn to their staff last year – an increase of 2.2% from a year earlier. But other sectors, such as IT and communication services – including marketing, advertising and PR – contributed more to growth as bonuses at non-financial companies rose 5.4% to £30.4bn.
The rewards on offer in the communications business were highlighted when WPP, the world’s biggest advertising company, paid its founder and boss Sir Martin Sorrell almost £67m in bonuses for last year. WPP suffered a shareholder rebellion, but approved the payout. At BP, a majority of shareholders opposed chief executive Bob Dudley’s bonus-fuelled £14m pay deal. But the vote is only advisory and the rewards were still handed over.
Nick Palmer, a statistician at the ONS, said: “Although the finance and insurance industry retains the largest share of the total, other industries, particularly among professional and hi-tech business services, have been the biggest drivers of growth since 2008.”
Bonuses are spreading beyond the City, even as evidence mounts that the payouts are not good for companies in the long run. A Cornell Law School study found in 2014 that a company performs worse the more it pays its chief executive and that bonuses promote selfishness and opportunism.
Neil Woodford, one of the UK’s top fund managers, has recently scrapped bonuses for his employees, arguing they are ineffective and can encourage bad behaviour.
Finance and insurance workers received the highest average bonus at £13,400 per employee. Health and social workers got virtually nothing.
Almost all the total for last year – £43.7bn – was in the private sector with few bonuses in the public sector. Civil servants, teachers and hospitality workers were also near the bottom of the rankings.
Though the cash value of bonuses was a record last year, the peak year for bonuses as a proportion of total pay was in 2008, when they accounted for 7.1% compared with 6% last year.
The City’s bonus culture was widely blamed for fuelling the credit boom and financial crisis by rewarding bosses and traders with cash for short-term results. In some cases, such as Fred Goodwin at Royal Bank of Scotland, chief executives became multimillionaires while leading their companies to the edge of collapse.
In the finance industry, bonuses peaked as a share of total pay in 2008 at 34%. The equivalent figure was 22.7% last year, down from 23.1% the year before. In other sectors, bonuses were 4.5% of total pay last year – the highest level since the ONS started its calculations in 2000.
Oliver Parry, Head of Corporate Governance at the Institute of Directors, said bonuses could be a useful incentive for staff, but warned caution was necessary with financial sector bonuses and that the scale of payouts should be linked closely to performance: “Firms have to be very careful in areas like financial products that they don’t create a culture which encourages staff to behave unethically, as we saw with PPI mis-selling.
“A separate question is the use of performance-related pay for senior executives, where there have been problems. A few thousand pounds for an employee who hits their targets is one thing, but multi-million bonuses and share awards for CEOs where company performance has not been outstanding, such as we saw at BP, anger shareholders and employees alike.”
The ONS said bonuses as a percentage of total pay were 6% for the whole economy, a small increase on the previous financial year.