Bankers’ bonuses should be reintroduced, Central Bank says

The Central Bank has warned the Government that an effective ban on bankers' bonuses represents a "current and future risk" to the stability of the banking sector, with critical staff being poached by big tech companies and relocating British banks.

The warning is contained in a letter from outgoing Central Bank governor Philip Lane, sent to Minister for Finance Paschal Donohoe last week. The Department of Finance had asked the Central Bank for its input into a consultants' report commissioned by the department.

Mr Lane wrote there is a case to be made for bonuses – or “variable pay” – as banks are struggling to hold on to staff in the face of competition. “The affected banks are competing for talent not just with other banks, but also with professional services and technology firms,” he wrote, adding that “there is a risk of losing staff in critical functions or with specialist skills”.

‘Incentivise behaviours’

“We believe there may be merit in allowing more enhanced flexibility with respect to remuneration for such staff. In particular, and if executed effectively, variable pay can support and incentivise behaviours that are consistent with positive consumer outcomes,” the bank wrote, adding that bonuses can be trimmed in a downturn more easily than core pay, which would increase flexibility.

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Banks relocating from Britain are “likely to offer more flexible and attractive remuneration structures than those currently available in the impacted banks”, Mr Lane wrote.

The reintroduction of bank bonuses, if the Government goes ahead with it, would represent a significant change in the State's banking policy. Pay restrictions were introduced for bailed-out banks by former minister for finance Brian Lenihan in 2009, enforcing an 89 per cent tax on bonuses and limiting salaries to €500,000.

Pay cap removal

The letter is more muted on the removal of the pay cap, which has been blamed for the departure of senior bankers at majority State-owned AIB, including former chief executive Bernard Byrne, who left last year for stockbroker Davy. Mr Lane wrote that the cap "may limit the recruitment pool for senior leadership roles in these banks".

“At the same time, the level of pay is not the only factor that motivates qualified individuals to apply for leadership roles in these significant institutions that play an important economic and societal role,” Mr Lane wrote.

Later in the letter, he writes that he has no “evidence that the remuneration restrictions are having a material effect on the pace or effectiveness” of remediating legacy issues in Irish banks.

He also cautions that showing more flexibility on bankers pay "will not in itself be a solution to the challenges within the affected banks", arguing that more must be done to improve talent coming through the system and enhance diversity. He also reminds Mr Donohoe that ultimately, the policy rests with the Oireachtas, not the Central Bank.