UP TO 10,000 staff in Bank of Scotland's corporate banking division are to miss out on tens of millions of pounds in performance-related pay-outs as the company is to cut bonuses for the first time in its history, it has emerged.
It is the first major Scottish institution to confirm it is to slash staff bonuses, but experts fear a wave of cuts is set to hit professions such as law and accountancy and in other financial-sector firms, such as Royal Bank of Scotland.
Bill Jamieson: Bonus freeze part of a chill that will see the wealthier shiverHalifax Bank of Scotland (HBOS) employees usually receive their bonuses in April, and many use them to pay off mortgages or fund private school fees.
But staff were told this week that, as a result of the current economic situation, no bonuses – estimated to cost HBOS tens of millions of pounds a year – would be paid out for 2008.
The news came as bank shares plummeted yesterday on rumours that HSBC might tap shareholders for up to £20 billion in a rights issue, and a further 2,100 job cuts were announced at Barclays. HBOS shares ended the day 13.5 per cent lower at 70.1p, while RBS fared even worse, dropping 18.4 per cent to 41.7p.
A government rescue package to guarantee up to £20 billion of loans to help small companies survive the economic downturn was branded "too little, too late" by critics, who feared the cash would not be enough to boost business lending from banks. It was also announced that Mervyn Davies, the chairman of Standard Chartered, had ruled himself out of a senior post at RBS and taken up a position as a minister in the Department of Business.
Last night, in a further sign of the deepening crisis, John Varley, the chief executive of Barclays, said he backed "judicious" quantitative easing – effectively printing money – in order to get the economy moving again.
Yesterday's blow to staff at HBOS's corporate banking arm, which was formed in 2001, comes days after the retailer John Lewis warned that its Edinburgh store was set to become one of the chain's worst-performing as the credit crunch hits the spending power of the city's financial workers.
A spokesman for HBOS told The Scotsman: "We recognise that corporate colleagues have worked hard during 2008, but entitlement to bonuses has always been discretionary and it must be linked to business affordability. We therefore regret that no bonus awards will be made for 2008."
He added that it was currently only the corporate banking division that had been affected by the bonus cuts.
HBOS's Bank of Scotland Corporate division, which negotiates loans with business customers, employs about 10,000 people in the UK.
In recent months, it had more than £4 billion invested in property ventures alone, including substantial stakes in some of Scotland's most significant companies in the troubled commercial and residential property sector, including Miller Group and Cala.
On Monday, a court gave the green light to Lloyds TSB's £12 billion takeover of HBOS. Although no job losses have been confirmed, it is feared the deal could lead to up to 40,000 posts going, with Edinburgh expected to be among the cities hardest hit by redundancies.
Bryan Johnston, an analysts at the Edinburgh-based Bell Lawrie, warned that workers in the financial sector needed to rethink their attitudes to bonuses. He said: "With HBOS coming under the wing of Lloyds TSB, it is not surprising they will have to look at their costs closely. There is a feeling in some quarters that bonuses have become a God-given right, and we have to take a look at that and change the culture.
"People expect a bonus and are spending them a year before they receive them. Bonuses need to be returned to being a reward for exceptional work."
HBOS said almost all workers at the corporate division, which axed about 90 staff in May last year as the credit crunch began to take hold, were usually eligible for a bonus – only fairly new employees missed out.
The amount workers receive is usually calculated on the performance of their division, combined with the group's overall performance and their annual salary. But, according to the bank's annual report, bonuses "may be equivalent to 20 per cent of salary or more" – and could be as much as 70 per cent of salary for the division's highest-paid staff.
An industry insider said: "They held a briefing for the whole of the corporate banking side of the business and they were told there would be no bonuses. There were a lot of heads down and head-shaking going on when the announcement was made.
"The thing is, bonuses have become a way of life in the sector. Some people's view might be they should be performance-related, but it has become something bank workers expect and rely on."
Andrew Murphy, the general manager of the Edinburgh branch of John Lewis, warned last week that it was likely to suffer disproportionately from the economic downturn.
Roy Durie, a senior partner at Ryden consultants in Edinburgh, confirmed his fears. He said: "Until the situation with HBOS and its staff is sorted out, we won't really know how it's going to pan out for the economy, particularly in cities like Edinburgh, where there is a real need to start with a clean slate.
"Even if people are not losing their jobs, they are likely to have less money to spend without bonuses, and that will affect everything from leisure and licensed trade businesses to the property market."
He added: "There's no doubt this kind of thing can have a huge knock-on impact. We're already seeing the effect of this kind of thing in Edinburgh, where people just don't have the same kind of disposable income they had a year ago.
"You only have to go into a restaurant that would normally be full and see how easy it is to get a table. Edinburgh is much more vulnerable because of the amount of people who are employed in the banking sector."
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