Labour Research May 2012


When bonus pay is no dividend

The impact of the bonus culture on low-paid workers in the finance industry is very different to that enjoyed by top bank executives.

Bonuses are a significant feature of the pay systems operating in the finance sector. But while media attention has been justifiably focussed on the eye-watering bonuses paid to top bank executives, the impact of the often discretionary bonus pay system on low-paid finance workers has attracted far fewer column inches.

There was public outrage earlier this year over the bonus of nearly £1 million due to be awarded to Stephen Hester, chief executive of the 83% taxpayer-owned and bailed out Royal Bank of Scotland (RBS), on top of his £1.2 million annual salary.

The subsequent campaign and public pressure that eventually shamed him into refusing the bonus was just one sign of the anger felt by many ordinary workers facing redundancies, pay freezes and suffering from government cuts to public spending following the bailout of banks in 2008.

Many blame the greed of the bankers, who continue to reward themselves astronomical salaries and huge bonuses, for causing the financial crisis.

Basic pay is low for ordinary bank workers

But according to Liz Cairns, research officer at the Unite union which organises workers in the finance industry, ordinary bank workers are also bearing the brunt of a hostile media who fail “to differentiate sufficiently between front-line bank workers and those in receipt of six figure salaries”.

In fact, far from earning those much publicised mega-salaries, financial results for 2011, published in February and March this year, show that annual salaries in the industry for customer service officers and administrative level grades — which form a significant proportion of Unite’s membership in the banking and finance sector — are around only £19,500. Senior admin workers earn around £22,500.

At the very pinnacle of the earnings scale, bonuses handsomely reward top banking executives who receive hefty sums if they make a short-term profit — and a bail out if they go bust.

Yet as Cairns told Labour Research, for those on the bottom rungs of the pay ladder, the removal or buy-out of annual profit-related bonuses, and the introduction of more performance-related bonuses means ordinary bank workers “face unrelenting pressure to perform”.

Ged Nichols is the general secretary of the Accord trade union which organises in Lloyds Banking Group (LBG). He says that for workers in support services like IT, operations, HR and legal, basic pay levels are between £14,000 and £27,000, with around 5% of total salary based on bonus payments, related to how the business or a particular division performs, together with an individual performance element.

Outside of London (where an additional London Weighting payment of around £3,500 applies), members working in retail banking, in call centres and behind the counters of branches, typically have basic pay levels of around £16,000 to £17,000. On top of that, bonuses and incentive arrangements linked to the amount of products they sell make up around 12% of their total pay.

In its 2011 submission to the High Pay Commission (HPC), Unite pointed out that bonuses, which form part of performance-based pay schemes, are a key feature of the pay systems operating in the finance sector.

These bonuses can be contractual or discretionary. But while contractual bonuses are negotiable, they are rare in the sector, with anecdotal estimates that only around 5% of all bonus awards are paid in this way.

Bonus culture causes stress

The union says that it is the discretionary bonus which is by far the most prevalent method used, and that “discretional bonus structures can be subject to criticism over the lack of transparency; are open to discrimination and can harbour claims of favouritism in the distribution of bonus”.

Accord says that bonuses also depress basic, pensionable pay and affect the morale and health and safety of staff. “Bonuses are also linked to customer service feedback and regulatory requirements,” Nichols told Labour Research, adding that “there is undoubtedly pressure to sell and, as a result, stress is endemic in the industry”.

Unite has launched a campaign to “bring a cultural change within the Lloyds Banking Group and ultimately the finance sector”. This is calling for an end to the unfair bonus culture; an end to unachievable targets; and staff to get a fair day’s pay that is not linked to sales.

In its HPC submission, Unite set out its concerns about the link between performance and targets throughout the sector — not just for top executives. The union says that these can work against positive engagement and lead to low morale, de-motivation and increasing stress and absenteeism.

Anecdotal evidence from Unite members and representatives, and an increase in the level of performance-based disciplinary hearings which Unite has been involved with, supports these concerns.

Unite and Accord recently carried out a stress survey that received an unprecdented response from some 11,000 workers in LBG.

This found:

• 85% of respondents said they felt stressed by their work;

• 77% said they suffered from symptoms caused by stress including anxiety attacks and depression;

• 57% of respondents agreed strongly that they faced “unremitting pressures to perform well”; and

• 74% indicated that unrealistic targets were a cause of stress with 65% identifying uncertainty about their future as causing stress.

The unions are pressing LBG to introduce a group-wide stress prevention policy and the survey results are intended to add weight to their proposals. They also point out that the bonus culture and its pressures are not only bad for workers, but also for customers and investors.

Bonus structure and miss-selling

Unite’s HPC submission says that remuneration systems and the practices which determine reward can result in undue risk. And it warns that these practices can create a culture where excessive risk becomes acceptable.

The union says that this “is especially evident when risk, which is associated with reward, is combined with unashamed greed, or for those at lower levels of the organisation, the fear of disciplinary action”, as both of these can override sound financial advice and judgement, “and may act against consumer or investor interests”.

Cairns points to a significant increase in recent years in complaints to the Financial Ombudsman Service, which looks into consumer complaints about financial businesses, as an indication that the industry is failing to treat customers fairly.

Fair treatment is a key principle of the industry regulator, the Financial Services Authority (FSA), which reported that the total overall number of complaints to financial services companies increased by 21% to 2,256,172 in the second half of 2011. This was largely due to complaints about payment protection insurance (PPI) which sky-rocketed in the last months of that year.

PPI, an insurance sold alongside loans and credit cards to cover payments if the borrower lost their job, was widely mis-sold by banks, and the financial payout to consumers currently stands at between £5 billion and £7 billion.

Accord is keen to align employee and customer interests and improve the quality of service to investors and consumers. “What bank staff want is to do an honest job, provide a good service and give customers what they want, not foist things onto them,” said Nichols.

The union is currently working with the consumer group Which? to establish whether there is a link between the bonus culture in the UK and poor customer service arising from staff feeling pressured to sell more products.

A 10-point manifesto drawn up by Which? calls for a ban on sales incentives and commissions for bank staff which incentivise mis-selling, with branch and call centre staff rewarded instead for providing high-quality service.

2012 pay round

As Labour Research went to press, the banking unions were in the middle of negotiating the 2012 pay round. RBS and LBG had not settled.

Unite launched a Fair pay campaign at RBS, explaining to members that if RBS imposes its pay offer, “it will mean that 28,000 staff will get no pay rise this year and for those who do get a pay rise the majority will receive pay rises of 1% to 2%”. It pointed out: “This represents a pay cut for all RBS staff.”

The union’s pay claim was for an increase in base pay for all staff in line with inflation, providing a percentage increase for all, irrespective of position in the salary range or appraisal rating.

And it wanted a continued commitment to eliminating the gender pay gap, to which bonuses contribute significantly. It was also looking for an increase on the current cap on pensionable increases.

At LBG, 10% of the workforce was due to receive no pay rise, while the bonus pot was due to be reduced by 30% and deferred over the next three years. The bank and unions were attending the arbitration and conciliation organisation Acas following a failure to reach agreement as Labour Research went to press.

Bonuses and the gender pay gap in finance

The Equality and Human Rights Commission (EHRC) carried out an inquiry into sex discrimination in the finance sector in 2009 and produced a follow-up report in September 2011.

Findings from the 2011 Financial services inquiry: follow-up report included:

• in many firms, employees do not know how much their colleagues are paid, and this lack of transparency allows inequalities to grow;

• in some roles, bonuses often form a significant element of take-home pay, and sometimes appear to be based more on an individual’s readiness to ask for more than rewards based just on their performance;

• there is evidence of gender bias in the distribution of bonuses and performance-related pay. In more than half the cases, the gap for discretionary performance-related pay was 45% or more; and

• women experienced a range of adverse impacts including the loss of bonuses and less favourable performance assessments for taking maternity leave.

The report, based on a detailed examination into the pay, policies and practices of 44 organisations (employing the equivalent of just under 23% of the workforce in the sector), revealed that bonuses are a significant factor behind the gender pay gap.

In these organisations, men were receiving five times the performance pay of women — an average of £14,554 in annual performance-related pay compared to the female average of £2,875 (based on full-time equivalent earnings).

The EHRC recommendations included a call for greater transparency, with finance companies making available data on basic pay and bonuses stratified by gender.

However, elsewhere across the finance sector, Unite reports that it has negotiated increases of around 2.5% with lower grades targeted for an uplift. And a number of finance organisations have made a commitment to becoming Living Wage employers, paying £7.20 an hour, or £8.30 in London .

Information compiled by the National Union of Students and the UNISON public services union shows that a number of finance companies — including Barclays, HSBC, Deutsche Bank, Morgan Stanley, RBS and KPMG — are signed up to the Living Wage.

In addition, Cairns said: “We have seen a move away from a discretionary element of pay which is welcome and something we have been campaigning for as it can be subjective, biased, non-transparent and unfair.” She said that the union has also seen an increased commitment to carrying out equal pay audits in a number of companies. But there is still a long way to go before union demands for the sector are met.

Cairns emphasised that as far as Unite is concerned, “it is vital that the outcome of the financial crisis is a reformed banking and finance sector which supports a long-term outlook that meets the needs of society and the real economy”.

She added that this should include fair and transparent pay systems for all workers, including employee representation on remuneration committees; as well as employment security, with an end to the jobs cull in the sector and the rush to outsource and offshore.

And there should be “a reassessment of performance management systems with greater emphasis given to service rather than sales, delivering fairness for both customers and employees”.