Media Briefings

BONUSES STILL PLAY A BIG ROLE IN THE UK’S FINANCE SECTOR

  • Published Date: April 2014

The UK’s financial services sector still pays around a quarter of its wages in bonuses, compared with well below 10% in other sectors. And while bonuses in finance fell after the crisis, their share of total bonuses in the economy is now larger than it was a decade ago. These are some of the findings of research by John Forth and colleagues, to be presented at Royal Economic Society’s 2014 annual conference.

As banks seek to revise their payment schemes to deal with the European Union’s bonus cap, the study by the National Institute for Economic and Social Research (NIESR) looks at the changing share of bonuses in different sectors of the UK economy between 2000 and 2012, particularly during the recession.

According to the report:

• In every year since 2000, at least 20% of all wages paid out to finance workers have come in the form of bonuses.

• Between 2000 and 2012, workers in the finance sector received 7% of all base pay in the economy, but 39% of all bonus payments.

• Bonus payments have fallen in finance since the crisis, but the bonus share remains around five percentage points higher than the level seen in the early 2000s. In contrast, bonus payments in other sectors in the economy have remained low and stable since 2000.

• The finance sector pays around a quarter of all wages in the form of bonus payments.

• This compares with around 7% in other private sector services, 5% in manufacturing and less than 1% in public services.

• Since 2000, there has been no increase in the share of employment in firms that use performance-related pay, but firms that use such schemes have increased the share of pay that is tied to performance.

The research, the first in the UK to study the size of bonuses relative to firms’ overall wage bill, analyses data from the Monthly Wages and Salaries Survey, which forms the basis for the government’s official measure of earnings growth.

Co-author John Forth says:

‘The size of bonus payments has come under increasing scrutiny in recent years. Our research shows that the finance sector is clearly unusual in the extent to which it uses large bonus payments to motivate and reward its staff.

‘The research also shows that bonuses remain relatively high in that sector. An important challenge now is to understand more fully how firms arrive at decisions about the size of these bonuses.’

More…

As banks seek to revise their bonus schemes to deal with the EU’s bonus cap, this research shows just how important bonus payments have become in determining the total wage paid to workers in the finance sector – and how much less important they are for workers in other sectors of the economy.

According to the study, around 25% of all wages paid to finance workers come in the form of bonus payments. This compares with around 7% in other private sector services, 5% in manufacturing and less than 1% in public services.

The finance sector is also responsible for much of the annual change in the average size of bonus payments in the economy. The bonus share in finance rose sharply in the years leading up to the economic crisis; it has since fallen back but bonuses nevertheless remain larger than they were a decade ago.

Bonuses and other forms of performance-related pay attract a great deal of attention from economists because of their potential to recruit, retain and motivate workers. Economic studies show that bonus schemes can improve performance, but that they can also have unforeseen consequences – evident in public disquiet about excessive risk-taking in the banking sector.

The NIESR team set out to study the importance of bonus payments in determining the total wages paid out to workers in different sectors of the economy, and to examine how the level of bonuses changed over the period 2000-12, particularly through the recession.

The research is the first in the UK to study the size of bonuses relative to firms’ overall wage bill. It uses data from the Monthly Wages and Salaries Survey – the monthly survey carried out by the Office for National Statistics, which forms the basis for the official measure of earnings growth (the Index of Average Weekly Earnings).

The researchers find that in most sectors of the economy, bonuses or other forms of performance-related pay account for a relatively small share of the total wage bill. The finance sector is a clear exception.

In every year since 2000, at least 20% of all wages paid out to finance workers have come in the form of bonuses. This means that over the whole period from 2000 to 2012, workers in the finance sector received just 7% of all base pay in the economy, but they received 39% of all bonus payments.

Bonus payments in finance were at their highest in 2007/08, just prior to the crisis, when they accounted for around 35% of all wages paid out in the sector (see Figure 1 below). This was the culmination of five years of growth from 2003 when the bonus share stood at just 20%.

Bonus payments have fallen back in finance since the crisis, but the bonus share remains around 5 percentage points higher than the level seen in the early 2000s. In contrast, bonus payments in other sectors in the economy have remained both low and stable since 2000.

Many economists have been expecting that the performance effects of bonus schemes and complementary changes in the structure of the economy – particularly the increase in skilled work – would encourage more firms to make use of such schemes.

But the research shows that there has been no increase since 2000 in the share of employment in firms that use performance-related pay. Indeed the use of such schemes appears to have fallen slightly over the past decade. The importance of bonuses in the economy at large has therefore risen because those firms that use such schemes have increased the share of pay that is tied to performance.

ENDS


Notes for editors: ‘Are Firms Paying More for Performance?’ by John Forth, Alex Bryson and Lucy Stokes is to be presented at the Annual Conference of the Royal Economic Society, in Manchester, on 9 April 2014.

John Forth, Alex Bryson and Lucy Stokes are all at the National Institute of Economic and Social Research. Their research was funded by the Economic and Social Research Council.

For further information: contact John Forth on +44 (0) 7815 906118 (email: j.forth@niesr.ac.uk): or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).

Figure 1: Bonuses as share of pay bill, by sector and year