Banks look for way ahead over bonus payments

Bank bonuses are set to undergo a radical change as the industry responds to new rules.

Institutions are looking at ways of linking the payouts to customer satisfaction, and how much capital banks have built up, rather than basing them on share price performance and profitability as in the past, according to a Sunday newspaper report.

All of the major banks, including Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays, are understood to be in discussions with major City investors about what the new performance criteria should be, with some also considering including targets on lending to small businesses.

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The changes are being driven by City watchdog the Financial Services Authority, which wants to see a clearer link between pay and performance – including the risks being taken by banks – in the bonuses they award.

New European-wide rules that came into force at the start of this year also set a new range of targets on which long-term incentive plans must be based.

But senior bankers are understood to have appealed to the Government for immediate guidance on how the current batch of year-end bonuses can be paid in the light of all the new regulation.

Representatives from groups such as Barclays, RBS and HSBC, have asked Chancellor George Osborne and Business Secretary Vince Cable for some clear information on what sort of bonus payments would be acceptable, according to another newspaper.

Line managers and finance departments at the major banks will be finalising bonus payments based on their group's financial performance during the coming few weeks, but the increasing number of varying guidelines is understood to be making the process difficult.

It is thought that City bankers will collectively share a bonus pot worth around 7bn during the coming two months , which is likely to spark outrage among hard-pressed consumers and small businesses who are struggling to borrow money.

The heads of the UK's five biggest banks are involved in talks with Mr Osborne and Mr Cable over constraining payouts.