Five of the UK’s biggest banks have agreed to curb bonuses paid out to high-flying staff.
HSBC, Barclays, Royal Bank of Scotland, Lloyds and Standard Chartered have all pledged to link bonuses to long-term performance.
The changes will come into effect for 2009 bonuses ahead of formal legislation, making the UK the first G20 nation to implement bank bonus changes. Chancellor Alistair Darling is hoping to convince other banks such as Abbey to sign up to the scheme in the coming days.
The banks said in a joint statement: "In a competitive and international business, it is right to make sure that our staff are appropriately and competitively rewarded for sustainable, long-term performance.
“We therefore welcome the G20 remuneration reforms, and their global nature, as it is essential that banking reward is consistent with effective risk management and that there is parity both nationally and internationally on these issues.”
The bonus clampdown is part of a larger package of reforms for the banking sector outlined in the G20 meeting in Pittsburgh last week.
Leaders agreed plans to limit the amount that can be handed out in cash bonuses – and payouts could be clawed back at a future point in time if a bank's performance deteriorates.
Banks must ensure that their bonuses are: “consistent with ensuring that they have the ability to maintain a sound capital base over the long term while managing the risks that arise if an organisation cannot pay competitively to retain the right people”.
Senior executives whose actions affect the risk exposure of the bank must have between 40% and 60% of their bonuses spread over three years. At least 50% must be in shares.
Meanwhile, the bonuses given to employees working in the risk departments cannot be linked to the performance of the trading divisions.
All companies will also have to compile pay reports detailing the total pay received and the criteria for receiving the bonuses.
The move has angered many within the industry.
David Buik, senior European economist at BG Capital Partners, says: “We all accept that the culture had to change but surely it was not necessary to disadvantage the UK against the US. Caps on bonuses are madness and no flexibility on distribution in terms of share options schemes is short sighted.”
Many top traders were anticipating multi-million pound bonuses after delivering strong trading returns this year.
Some are now contemplating legal action over the bonus crackdown. Around 70 former and current staff members at Dresdner Kleinwort are suing after they did not receive £30 million worth of promised bonuses.
The government has been pushing for the changes in the wake of the financial crisis. In speeches to the Labour Party conference earlier this week, chancellor Alistair Darling and Gordon Brown both promised to bring the bonus culture, which many believe played a large part in the reckless trading which led to financial meltdown.