Wedge me up!

Newspapers are giving a lot of coverage to the story that several UK banks (including RBS and Lloyds, both now part-nationalised) are planning to give bonuses to employees, just ahead of the expected announcement of restrictions on bankers' compensation. Is the bonus culture on its last legs?

Before I get into this, I should 'fess up that for at least the last 15 years of my banking career, bonuses of one kind or another accounted for well over 50% of my annual compensation. My base salary hardly changed at all in that period, as my employer steadily and very deliberately ratcheted up the importance of "variable comp".

Bankers (we're talking mainly about investment bankers here, rather than the High Street types) can offer a variety of reasons why they deserve huge bonuses. Your hours are long, your career is short, you're probably travelling half the time, you can get fired at any moment. Oh yes, you're also bringing in a lot of revenue for the firm. Companies paid bonuses because they recognised all of these things, and because they knew that the best people would quit if they weren't "properly paid". (To be honest, however, if I could have had £10 for every colleague who threatened to quit at bonus time but never actually did, I could probably have foregone any bonuses from the firm!)

If you want an indication of how entrenched the bonus ritual was, try this. Soon after I moved from Toronto to London there was a bit of a slowdown in the investment banking business. The President of the firm "asked" each of us to forego between 5% and 15% of our salary for six months to help out. But when December rollad around that year, bonuses were paid out as usual.

Excesses certainly crept into the bonus system in the last few years. We saw the introduction of the oxymoronic "guaranteed bonus", usually employed to lure a high-flier from a competitor. For some of the more obscure derivative products, bonuses began to be paid on the basis of assumed future returns, mant of which have proved illusory as the markets have unravelled. Now we see loss-making institutions, reliant on government support for their very survival, planning to pay out large sums to their employees.

There are various justifications being offered for this, though none of them is likely to cut much ice with the public. Some of the payouts are "guaranteed bonuses", which the banks are contractually obliged to pay. Others are payments to people whose individual businesses have remained profitable throughout the credit crunch. There certainly doesn't seem much likelihood of RBS paying big bonuses to its sub-prime team or its CDS originators.

All the same, it's legitimate to ask whether the bonus system has run its course. If banking is set to revert to the 3-5-4 model (borrow at 3%, lend at 5%, on the golf course by 4 o'clock), the big returns that paid for the bonuses will be no more. Most banks will stay away from the kind of arcane, high-risk products that allowed the bankers themselves virtually to set the size of their own bonuses, by exaggerating the expected returns to bosses who were in no position to prove otherwise. And the threat of quitting in a huff is going to have a lot less weight as the number of competitors dwindles. There will still be bonuses paid, but the gravy train has probably been derailed for a good long time. If you want to make big money in finance in the next few years, you're probably going to have to put some of your own money at risk.