City Bonuses

[Fancypants]

here

Why we should all care about soaring City bonuses

By Nic Cicutti, MSN Money Special Correspondent

November 07 2006

Thousands of City workers – and a fair few in the major financial centres of Glasgow and Edinburgh – are set to receive bonuses of at least £1 million this year. Million pound-plus bonuses will be awarded to a record 4,200 staff, an increase of a third on 2005.

These are the findings of research by the Centre for Economics and Business Research (CEBR), which suggests the total pot is likely to be in the order of £8.8 billion, itself a rise from about £7 billion 12 months ago.

The focus of attention during the current bonus season is naturally on those lucky individuals earning more than £1 million in one fell swoop. But there are many times that number who, while not joining the Millionaires’ Club this year, are still likely to be receiving a very generous five- or six-figure lump sum in the next few weeks.

For example, mid-ranking bankers might expect to receive an average of up to four or five times their annual salary of £120,000 for this year. A fresh graduate working as a low-ranking analyst, might receive £35,000, plus a bonus worth up to twice his or her salary.

In fact, there are some suggestions that the £8.8 billion figure is a massive underestimate of bonuses that are paid out. Once you include the smaller, but still significant, lump sums paid out, plus annual bonuses paid to boardroom executives, the total could reach £21 billion, according to Office for National Statistics (ONS) data.

Corporate greed or rewarding the City’s success?

Whenever bonus announcements of this order of magnitude are announced, the instinctive reaction is to talk about them in terms of corporate greed.

That’s not difficult to understand. The average annual income in the UK is £28,000, while median earnings – the amount earned by 50% of the population – are significantly less, so it’s easy to see why people feel uncomfortable with such telephone-number salaries.

The only people who come close to those figures are Premiership footballers and a small nucleus of sports stars. But at least they provide entertainment to millions of fans every weekend. It is difficult to see quite how most City types entertain us in the same way; dropping their trousers after an alcohol-fuelled night out does not really count.

Of course, people in the City argue they have earned their bumper payouts.

The CEBR suggests the record bonus figures are being fuelled by a combination of soaring stock markets – the FTSE 100 index of share prices has risen by more than 15% in the past year – and strong merger and acquisition activity in 2006.

The City is heavily focused on helping companies merge or take over each other and these activities tend to provide large bonuses for people who engage in them. Multi-billion pound deals within the last year have included the £15 billion takeover of airports operator BAA by Spain’s Ferrovial, plus P&O's acquisition by Dubai Ports World and the £17 billion takeover of mobile phone firm O2 by Telefonica.

Moreover, supporters of City bonuses argue that the City of London is the world’s leading international financial and business centre – a global powerhouse at the heart of the UK’s financial services.

Financial and professional business services made a net contribution to the UK’s current account of £19 billion in 2004, the last year for which figures are available, a significant amount of which was generated within the Square Mile. The City contributes around 2.5% to the UK’s gross domestic product (GDP) and 13% to London’s GDP, while London contributes over 18% to the UK’s GDP.

Judged on the basis of those figures, the rewards handed out to a few thousand, perhaps tens of thousands of individuals are an essential ingredient, oiling the machine which generates so much wealth for the UK economy.

Do bonuses really matter?

There has always been a relatively small group in society that is well-off, sometimes obscenely so.

The fact that a few thousand more people have joined the ranks of the rich should not make a huge difference – other than to highlight the interesting fact that the most vocal hostility to the idea of large City bonuses comes from elements in the media who believe a bunch of east London “barrow boys” are undeserving of the vast sums they will be receiving shortly. A bit like footballers, come to think of it.

Yet, in another way, bonuses do matter. Not because of the likely increase in sales of £30,000 watches and £85,000 cars: the “bling-bling” purchases of a few hundred individuals is neither here nor there. It is the effect of these bonuses on house prices, particularly in London, the M25 corridor, and a few other parts of the UK such as Glasgow and Edinburgh, that actually matter.

House prices

The bonus culture is seen as one reason property prices in London and the south-east of England are still rising, long after some experts suggested they should be calming down. Indeed, in other parts of the UK, prices are reasonably static.

Yet prices in the capital itself rose 1.2% in the last three months and are 8.5% higher than 12 months ago, according to Halifax.

One major consequence of the bonus boom clearly applies to £1m-plus properties.

Only a few hundred, perhaps 1,000 such properties are sold at this price every year, most of them in the south-east of England. But according to reports, estate agents in the capital have already started to report an upturn in business, particularly for top-end homes that have so far struggled to sell this year.

Savills, one upmarket agent, estimates that a third of its buyers are City-based. The company is predicting increased demand in areas like Knightsbrige, Mayfair and Belgravia. Meanwhile, another agent, Knight Frank says that 20% of people who have purchased property in London’s central areas this year work in financial services.

Why red-hot London house prices could spark a nationwide boom

Trickledown

Of course, for most of us, talk of £1 million homes might seem irrelevant. Those of us who have managed to get a foothold on the housing ladder are more likely to be buying and selling properties worth a fraction of that amount.

So why do the bonuses paid in the City matter? Simple, really: it’s not just the £1m bonuses a few thousand people receive that can affect the market.

Think of all the many thousands more who will be given a big lump of cash. Some will spend that money on fripperies, to be sure. But others will use it to pay off part or all of their mortgages, freeing themselves up for a future home move.

Or they will think about trading up into the next price bracket sooner rather than later, from a £500,000 property to a £750,000 one, for instance. Or they may start to consider the merits of a weekend cottage.

If so, who will they buy from? Probably from the City type whose own bonus means he can now move up into the £1m property. And who will they sell to? The person whose own bonus was a “mere” £50,000 or £100,000, as opposed to several times that.

Atkinson McLeod, a London agent specialising in property with a price tag of up to £750,000, claimed a good bonus season has a knock-on effect throughout the market, giving stimulus to properties down to the £350,000 level.

All in all, the ripple effect the bonus season is likely to spread far wider than most of us assume. And the consequence of that is that prices for even more modest properties are being pushed up for the rest of us.

Is there no end in sight to property surges?

Not in the immediate future. But it is worth remembering that City bonuses - and house prices – have not always followed a continuous upwards curve.

Those of us who can remember just five or six years back will recall how, when bonus payments came to a juddering halt following the stock market’s collapse in 2000-2001, the top of the property market slumped.

Bonuses fell by 30% in 2001 and another 40% in 2002, with 20% of City workers receiving no bonus at all.

The result was that between 2001 and 2003, average prices in sought-after areas of London advanced only slightly, compared with the period from 1999 to 2001, when properties in those areas went up by more than 50%.

Today, with stock markets reaching record levels – at least since their collapse in 2000 – no-one is banking on bonuses being cut sometime soon.

The result is likely to be that if you are:

A seller of a £350,000-plus property in the right area, looking to leave the rat race and find a calmer life in the country, you will probably make a lot of money

A homeowner looking to trade up to the next level, you may find yourself paying inflated prices dictated by forces outside your control

A first-time homebuyer in London and the south-east of England, or parts of Scotland, you may find it more difficult to climb on the housing ladder.

If so, those bonuses are likely to affect even those of us with far less glamorous and well-rewarded jobs.

[steve99]

The result is likely to be that if you are:

A seller of a £350,000-plus property in the right area, looking to leave the rat race and find a calmer life in the country, you will probably make a lot of money

A homeowner looking to trade up to the next level, you may find yourself paying inflated prices dictated by forces outside your control

A first-time homebuyer in London and the south-east of England, or parts of Scotland, you may find it more difficult to climb on the housing ladder.

If so, those bonuses are likely to affect even those of us with far less glamorous and well-rewarded jobs.

The free money belt in London has increased dramaticaly since the late 80's, many parts of London that were for working people are now out of bounds to anyone not getting big bonuses on top of a big wage, that also pushes the prices up in the next tier down etc, I remember people who bought terrace houses in places like Hammersmith and Shepherds bush in the mid 80s' on slightly above average wages (equiv to 30K today maybe), this is well out of the question now with £500K now minimum for a 3 bed terrace. Inlaws bought in Acton in 92 for £120K now same houses going for £470K however the new neighbors over the last few years are different, big city jobs and the street is full of big new beemers etc. This is what you would call the trickle up effect. The rich get richer.

[PropertyGuru]

This is what you would call the trickle up effect. The rich get richer.

till the tide turns

[Fancypants]

till the tide turns

recessions are great levellers - and unifiers.

[Orbital]

so taxed at 40% thats a lot of money for the inland revenue - good stuff.

[muggle]

so taxed at 40% thats a lot of money for the inland revenue - good stuff.

Not if they all p1$$ off to Monaco.

Having said that, that may not be such a bad thing - good riddance to the lot of them!

[Ngugi]

so taxed at 40% thats a lot of money for the inland revenue - good stuff.

These bonuses are probably paid in devious ways which aren't taxed. These guys know every trick in the book.

[Kingmaker]

Why hate the bonus getters?

They've always been around and always will be. Bonuses will be taxed at 40% - at point of origination, Monaco is a fallacy.