KEY POINTS:
There is no doubt that the bonus system in many banks around the world has proven to be wrong in the last 24 months. Andy Hornby, former HBOS chief executive European bankers face a painful adjustment as Governments and public pressure bring the curtain down on the era of the regular-as-clockwork seven-figure bonus.
Across Europe, the mega-perks now blamed as a trigger of the global financial crisis are being rolled back, either at Government behest, with the grudging consent of the banking sector, or as a voluntary move by individual banks themselves.
In their place is a mood of belt-tightening and prudence and an emerging, if still poorly defined, attempt to link bonuses to a bank's longer-term health rather than its short-term profits.
British Prime Minister Gordon Brown on Tuesday declared that board members of banks bailed out by the taxpayer would not receive bonuses this year.
The Government has pledged 237 billion ($657 billion) in bank rescues, notably taking huge stakes in the Royal Bank of Scotland (RBS), Northern Rock and the merged lenders HBOS and Lloyds TSB.
The crisis has dried up lending and corroded trust and has now slammed into the "real economy", prompting a political and public search for culprits.
Critics point the finger at the bonus culture, a target also singled out last week by US President Barack Obama, who set a cap of US$500,000 ($956,000) on pay at banks rescued by the Government.
Enemies of the big bonus say that rewarding an individual on the basis of annual profits or a team's performance fuelled the lust for reckless corporate expansion and complex, poorly supervised lending. "The old short-term culture is gone," Brown said. "No rewards for failure, rewards only for long-term and sustainable success, the old bonus culture removed and a new culture that rewards sustainable success brought in."
Yesterday, the House of Commons brought in the 21st-century equivalent of the pillory, hauling former heads of RBS and HBOS before a Treasury select committee.
After grovelling for the "distress" caused by the crisis, the fallen titans were grilled on the size and nature of their rewards.
"There is no doubt that the bonus system in many banks around the world has proven to be wrong in the last 24 months," admitted former HBOS chief executive Andy Hornby.
To pay staff cash bonuses for their decisions "without it being clear whether these decisions over the next three to five years have proven to be correct, that is not rewarding the right type of behaviour".
From 2005 to 2007, bonuses in the City of London rose from 5 billion to 15 billion. Now, though, the word "bonus" has become so tinged with abuse that banks, in their press releases, choose the term "incentive compensation".
A similar spirit is gripping France, where the French Banking Federation has unveiled a new "code of conduct" to regulate pay and bonuses.
The guidelines, applying to bonuses earned in 2009, include the recommendation that payouts be based on a bank's overall costs, including adequate capital ratios and risk coverage, rather than the trader's specific profit for the bank. The goal is to link the trader's incentives to the bank's long-term interest.
President Nicolas Sarkozy last year had already stipulated that bank bosses seeking a share of the 21 billion ($52 billion) in state loans to prop up their business had to kiss goodbye to their bonuses for 2008.
Germany also plans to ban bonuses and has set a cap of 500,000 on pay at salvaged banks.
Banks, too, are moving individually to scale back bonuses, either as a result of catastrophic results or moral pressure. Deutsche Bank is expected to slash bonuses for its investment bankers in London by 60 per cent, and Swiss banks are thought likely to make bonus cuts of between 55 and 80 per cent. Banks in Spain, Ireland and Denmark that have not taken part in bailouts are also wielding the axe.
Supporters of big incentives say that good rewards are needed to motivate the best talent. In a competitive environment, they argue, good performers will simply move elsewhere if they are not offered a decent enough carrot. And banks have plenty of loopholes to get out of national restrictions.
That latter point is made by the French Banking Federation, which says that an "international approach is essential" if the competitiveness of French banks is not to be eroded by the new guidelines.
Jakob von Weizsaecker, a fellow of Bruegel, a Brussels think-tank, said the pay issue was complex.
"Regulating these things, if you want to do that, isn't easy. We certainly shouldn't be overly emotional about it," he told the Herald. "There are advantages and disadvantages to being tough about managers' pay ... because there are no simple answers, it also makes it more difficult to co-ordinate at the global level."
In Brussels, suspicions run deep that the show of humility among European banks will not last beyond the present outcry - and that they will fiercely resist any attempt to tighten up international oversight.
On Tuesday, Charlie McCreevy, the European commissioner for the internal market, accused unnamed banking federations of using lobbyists to "totally neuter" a planned EU-wide law to toughen banking capital requirements and scrutiny of banks' activities and balance sheets.
"Those banking federations who have lined up wrecking amendments [in the European Parliament] are not serving to help recovery of trust in the capital markets but rather to underpin the distrust that is now embedded within them."
