A man walks past the Bank of England in London
Britain may still be groping its way out of recession, and figures released on Wednesday show that overall unemployment continues to rise, but for London's Square Mile — the capital's financial district — this is no time for austerity. According to two recent reports, London's banks are on a hiring spree. And where the jobs go, the rewards follow — despite lingering public outrage and the promise of a crackdown by politicians, big bonuses are back.
A pair of reports released by the London-based Centre for Economic and Business Research (CEBR) predict that the capital's financial institutions will hire 14,000 more people this year, and another 8,000 the year after. To sweeten the deal, they add, banks will grant £6.8 billion ($10 billion) in bonuses in this year — the highest level since the recession. "At its worst point in the downturn, recruitment levels were down 80% against peak," Paul Venables, Group Finance Director of the U.K.'s largest recruitment group, Hays, tells TIME. "But the activity level at the moment is more than double what was going on six or seven months ago."
And it looks set to keep up the pace. On June 14, the newly formed Office for Budget Responsibility suggested that the U.K. economy will grow less than expected in the next year — 2.6% instead of the forecasted 3% to 3.5% — but also that tax revenues will increase, which could potentially lead to even more jobs in the City. "I don't think their forecasts are right, unfortunately," says Douglas McWilliams, Chief Executive of the CEBR. "But if they are, there will have to be a big increase in both City jobs and City bonuses."
Many blame the bonus system, which rewards bankers for taking risky gambles with other people's money, for leading markets to the edge of collapse. Ahead of Britain's general election in May, politicians tried for easy votes as they lined up to denounce the excesses of the "bonus culture." So any sign that massive payouts are making a comeback is duly met with indignation: Have the banks learned nothing? The British public was livid when the Royal Bank of Scotland (RBS) Group announced in February that it would be giving out £1.3 billion ($1.9 billion) in bonuses, only five months after taxpayers had funded a massive bailout which would eventually lead to an 84% public stake in the bank.
RBS boss Stephen Hester argued that bonuses are just good business: if bankers are not paid rates equivalent with the rest of the industry, what's to stop the best and brightest from jumping ship? Tom Kirchmaier, an economist with the Financial Markets Group at the London School of Economics, finds them inevitable: "If you stopped paying bonuses, you'd throw your own company. It clearly can't be in the interests of anybody."
RBS has certainly found it harder to retain staff thanks to its stricter, government-imposed controls on bonuses and salaries. But banks that have come out of the recession in strong positions are looking to return to areas left fallow over the past few years. They've started taking on senior bankers who are after more profitable jobs now that the recession is over, and as talent draws upwards and away, it leaves room at the bottom for more employees. Much of the recruitment drive in the Square Mile is about filling the spaces they leave behind. "Recruitment is a musical chairs business," says Hays' Venables.
When it comes to bonuses, the City has, in fact, learned from its mistakes. But its chastening lies in how — not how much — bankers are paid. Banks are moving away from the enormous cash bonuses of the past, offering instead a 30-50% higher base salary and a correspondingly smaller maximum bonus. The idea is to dissuade employees from taking enormous risks in the hopes of earning significant bonuses. On top of that, the big banks are switching to a model favored by the smaller institutions, in which a large proportion of each bonus is paid in the form of shares, which cannot be sold until a minimum amount of time — usually three to five years — has passed. That way, bankers are less likely to take risks that could negatively affect their employer's share price, because if the share price suffers, their money suffers too.
Venables argues that the better of Britain's banks have become largely self-regulating, and are more selective about the risks they take. "I think the good banks have learned some lessons, and they're trying to make sure [their mistakes are] not repeated," he says. "The real question is how long will that stay in place."
The answer could depend on the government's plans for financial reform, which it is due to announce in an emergency budget on June 22. The previous government had introduced a one-off 25% tax on all bonuses paid last year, which turned out to be better PR than policy as employers found loopholes by paying bonuses early or deferring them instead. An income tax increase to 50% on those earning over £150,000 ($220,000) per year, which was introduced in April, has been more effective — the CEBR says it has netted the government £4 billion ($6 billion) from bonuses alone, a useful sum to a coalition that has promised to drastically reduce the national deficit of £156 billion ($227 billion).
If the City cuts bonuses while raising salaries to make up the difference, the government will appear to have tackled the risk-taking behavior that sparked the crisis while not affecting the high pay levels that provide so much income tax. Additionally, base salaries are much harder to squirrel away through loopholes than bonuses, which again increases income tax revenue and makes the whole system more transparent. It seems that the City is bringing itself into line before the government announces its plans for financial reform in June. Could it be banks have learned their lesson after all?