Warning: More tax could risk a City exodus

At the beginning of this week, HSBC revealed pre-tax profits of £11.8 billion for 2010, more than double the figure for 2009 and the highest earnings of any British bank since the start of the financial crisis.

This is welcome news as a strong and profitable banking sector is vital to support the rest of the UK economy.

Inevitably, such profits resulted in large bonus payments, with 253 employees - of whom 89 are based in the UK - receiving at least £1 million in pay and benefits in 2010.

These bonuses are no doubt largely confined to the investment bank side of the business, and not retail banking.

It is estimated that 22,000 people are employed in the investment bank side, meaning the big bonuses apply to just over 1% of the workforce.

HSBC also admitted that bonuses in Asia were some 40% higher than in the UK due to a very high demand for talented people.

The overall bonus "pool" has not been increased, reflecting a modest downturn in the investment bank's profits as markets became more challenging.

As one of the four leading UK banks to sign up to Project Merlin, HSBC has agreed to show restraint with regards to the payment of bonuses and to release information regarding the payment of senior managers - both of which it has done.

However, given the existing discrepancy between what comparable jobs pay in the UK and in Asia, firms are considering - and in some cases have already started - raising base salaries in order to avoid a drain of talent from London. Raising basic pay increases fixed costs and creates a more high-risk business model, thereby forcing banks to use redundancies as a cost-reducing measure in the event of a business downturn.

Most staff would doubtless prefer to remain employed and receive lower bonuses, while banks want to retain talented staff who have the option of moving to a centre where conditions and employment prospects are better.

Clearly the financial crisis flagged up certain remuneration practices within the industry that needed to be addressed, and this work continues, particularly - and quite rightly - at an international level through G20 and the Basel Committee on Banking Supervision.