Exclusive: Banks Braced For Cash Bonus Cap

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The two giant banks bailed out by British taxpayers in 2008 are preparing to impose a fourth consecutive annual cap on cash bonuses as they finalise staff payouts for last year.

I have learned that executives at Lloyds Banking Group (LSE: LLOY.L - news) and Royal Bank of Scotland (LSE: RBS.L - news) (RBS) are braced for the Government to push for a £2,000 ceiling on cash payments as ministers and investors seek to drive down pay in the financial services sector.

The boardroom remuneration committees at Lloyds and RBS have begun consulting with leading investors about the size and shape of their bonus pools for 2012, with approximately eight weeks remaining until the two state-backed banks report their full-year results at the beginning of March.

No formal talks have yet taken place between the banks and UK Financial Investments (UKFI), the body which manages the taxpayer’s 82 per cent stake in RBS and 41 per cent of Lloyds, about using the £2000 limit again this year.

However, several bank executives spoken to by Sky News in recent days said a repeat of the £2,000 cap was inevitable.

Any nod toward restraint would gain public support from Cabinet ministers such as George Osborne, the Chancellor, and Vince Cable, the Business Secretary.

“It would be politically impossible for the Government to sanction a removal of the cap, or even raising it modestly, given the wider economic environment,” one of the bank executives said.

The £2,000 limit on cash payouts was introduced in 2010 amid pressure from Gordon Brown’s Labour government a few months before the general election.

It was repeated in the following two years, and in 2012, David Cameron, the Prime Minister, said the cap was essential as part of a broader Coalition crackdown on executive pay.

The imposition for a fourth year of the cash cap is unlikely to muster significant opposition from Lloyds and RBS executives, who in previous years have complained privately that it leaves them more exposed to having employees by other banks not subject to the cap.

That is because intensifying pressure from City shareholders and new remuneration rules set out by the Financial Services Authority (FSA) have triggered a reduction in cash bonuses across the banking industry.

Both Barclays and HSBC (LSE: HSBA.L - news) both imposed cash ceilings on investment banking staff last year - although these were much higher than the £2000 limit at Lloyds and RBS.

The FSA has been particularly robust about banks' plans to pay bonuses for 2012, arguing that the spate of scandals which has hit the industry - ranging from payment protection insurance mis-selling to Libor rate manipulation - must be reflected in the size of payouts.

Only the cash components of bonuses for Lloyds and RBS staff would be restricted to £2,000, with dozens of staff likely to receive share-based bonuses running into tens or hundreds of thousands of pounds.

These employees will principally be employees of RBS's global banking and markets arm, although there will be fewer of them this year than in any previous bonus round since the bail-out of the banks because of the subdued performance of the division.

RBS has already side-stepped the annual row over the bonus of Stephen Hester, its chief executive. He waived his entitlement to be considered for a bonus following the IT systems glitch last summer which left millions of RBS customers without access to their accounts.

Lloyds, RBS and UKFI all declined to comment.