Attempts by UK policy makers to cap resurgent City bonuses will be very damaging, unless competition between banks is increased, according to the Centre for Economics and Business Research.

According to research on the London and City economy carried out by the CEBR, bonuses paid for 2009 are set to increase by 50 per cent on payments made for the 2008 financial year.

The research points to total bonus payments of £6 billion ($10 billion) being paid at the start of next year. Although a significant improvement from CEBR's forecast in April, £4.1 billion, this sum remains a fraction of the £10.2 billion paid at the 2007 peak.

Although fewer people now work in the City to be eligible for bonuses, banks profits jumped over the summer months. Wall Street bank Goldman Sachs, for example, put aside 84 per cent more for its third quarter bonus pool than it had allocated before August. The sum of $5.35 billion in compensation and benefits was announced after third quarter earnings of $3 billion. 

Yet although executive rewards are linked to a bank’s profitability, CEBR believes reform of compensation schemes must take into account the current state of the industry in the UK.

“Banks profits have risen very sharply this year, reflecting a lack of competition in the market. It is not surprising that the increase in bonuses has matched these higher levels of profitability. Any attempt to deal with bonuses is likely to be either unsuccessful or very damaging unless it addresses the issue of lack of competition which is at the heart of the sharp rise in profitability,” said Douglas McWilliams, chief executive at CEBR.
 
The City researcher has estimated that the financial crisis caused the loss of 49,000 City jobs - 14 per cent from a 2007 peak. It does not expect financial sector employment to return to its 2007 peak for at least ten years, meaning that even at the top level, bonuses are unlikely to regain their peak level for another five years.

“Bonuses are beginning to bounce back but will not reach the levels of 2007 anytime soon,” said Benjamin Williamson, CEBR economist and co-author of the research.