Many UK workers could not hope to earn the RBS chief’s rejected £1m bonus in a lifetime, but are bonuses and incentives now a key part of our standard payment package? Channel 4 News investigates.
From being vilified for his nearly £1m bonus package, on top of a £1.2m annual salary, RBS chief Stephen Hester is now being held up as a martyr, generating almost pity for waiving his performance-related payout.
Issues of fairness and inequality inevitably accompany the debate on bankers’ bonuses – and Mr Hester’s pay package is no exception.
Even within banking however, there is huge disparity. In 2009, 2,800 bankers working in 27 banks across London received more than £1m each in bonuses. But Rob Harborn, an economist with the Centre for Economics and Research is keen to point out that this year, 70 per cent of people working in the finance sector get less than £20,000.
The think tank has been monitoring financial pay since the early 1990s when bonuses were steadily rising. “Since then, there’s been a reversal of that pattern,” says Mr Harborn. “Bonuses have fallen quite dramatically this year and last. That’s partially due to big job losses for 2011, as well as bonuses being smaller.”
The life of big-shot bankers is a world away from the vast majority of UK workers. But figures from the Office of National Statistics show that most of us get some kind of one-off annual payment.
The median bonus for UK employers was £1,000 – down 2.6 per cent since last year, but this figure is heavily weighted by extremes at either end.
Perhaps unsurprisingly, corporate managers – in the public and private sectors – fare the best in comparison with other sectors. Of the nearly 3 million people employed in this industry, the median bonus is £4,000, and while figures on how much the top 10 per cent earn are unavailable, statistics show that 90 per cent get a bonus of less than £28,000.
At the other end of the scale, what the ONS calls the ‘elementary administration and service occupation’ – basically junior administration roles, postal workers, sorters and couriers – have had to swallow a 64 per cent drop in their bonus since last year. A median bonus in this sector is now around £179.
Bonuses are firmly embedded into the banking and finance sectors, and get exponentially higher as someone moves up their company. But in professional occupations, such as science, health or public service, which employs nearly 3 million people, the median bonus is just £1,800.
As the growth of average earnings falls well below inflation, which currently stands at 2 per cent, have bonuses and other incentives become more important?
The global recruitment company Hays says that bonuses are certainly considered important to employees, but that they can no longer be relied upon as a “guaranteed boost to the salary package”.
In the legal sector, where almost half of employers have imposed a universal pay freeze, only 17 per cent of employees said that individual performance-related bonuses are important. In the construction industry, including architects and builders, nearly 60 per cent of empoyers have reduced staff bonuses – but nearly 70 per cent of empoyees said that a benefits package, including bonuses, are very important when looking for a new job.
Even in banking, the bonus culture has changed hugely after the amount rising steadily in the 1990s, Mr Harbron told Channel 4 News: “Bonuses have fallen quite dramatically this year and last – partially due to big job losses for 2011, as well as bonuses being smaller.”
However in straitened times, bonuses do not always need to take the form of cold hard cash. Since the introduction of a 50 per cent tax on bonuses over £25,000 in 2010, salaries have tended to increase and banks have changed bonus packages to include shares.
But shares and performance-related incentives should be considered for employees at every level, not just at the top, Kayte Lawton from the Institute of Public Policy told Channel 4 News.
Her research into relationships between pay, performance and equality found that share option schemes, where individuals have a stake in their employer’s success, tend to have the most effect on employee performance, “but only when it’s available to everyone,” she adds.
Hays’ survey of the accountancy sector found that nine out of ten employees are attracted to jobs with share incentive schemes.
Much has been made of the John Lewis co-operative model of business – the “golden boy” of the corporate world. The reason this model is considered so fair among consumers and experts alike, despite its chief executive’s ample income of nearly £1m, is because reward is proportional – at John Lewis, bonuses are related to the company’s performance, and this year, stood at 18 per cent of each employee’s salary.
If anything, the debate about the RBS chief’s pay shows just how much importance is placed on the person at the top of an organisation. But that is starting to change, says Ms Lawton.
“It creates the impression that we have to pay a few people at the top an awful lot,” she told Channel 4 News. “But a lot of people have started to question this idea that one person is responsible.”
‘We got a lot for not much effort’
In the property sales sector, one agent told Channel 4 News that the bonus culture had changed hugely in recent years. “When I started working here around eight years ago, there were a huge number of bonuses and incentives.
“I used to earn between a third and two thirds again of my salary in commission and top-ups. The landlords we were working for would sometimes run incentives like higher commissions on certain buildings, or vouchers for restaurants or days out on top of commission.
“That has largely been banned or stopped. In my sector, it was felt that the big providers were using incentives unfavourably. They might still give vouchers now, but it it has to be spread equally among the team.
“In short, the changes benefit the consumer: the brokers working for them are much less motivated by which building the customer chooses, as long as they find a match. And good brokers are better paid because their percentage of commission gets higher the more they do.
“Broadly speaking it’s much fairer. Myself and my colleagues recognised that these were the golden years – we got a lot for not much effort. It was ridiculous.”