Bank governor attacks City bonus culture

The Governor of the Bank of England today made an unprecedented attack on the bonus culture in the City.

Mervyn King called on banks and other financial institutions to change the "unattractive" practice of offering huge remuneration deals to often inexperienced staff, causing some to take unacceptable risks.

He said the global credit crisis should force banks to realise "they are paying the price for having designed compensation packages which provide incentives that are not in the long run in the interest of the banks themselves".

Mr King told MPs on the Treasury select committee that he had been more impressed by the people running small firms across Britain than by London's top financial figures.

He said: "They are paid far less than people in the City. They export to maybe a dozen countries, operating with two or three thousand employees. They have a tiny, tiny number of highly qualified people working for them and the rest are ordinary, highly motivated people drawn from the community."

He told MPs that City firms lured too many of Britain's brightest young talents. Mr King said: "It is rather unattractive that so many young people, when contemplating careers, look at the compensation packages available in the City and think that these dominate almost any other type of career.

"It's not a very attractive situation that such a high proportion of our talented young people naturally look at City and think it is the only place to work in. It shouldn't be."

Mr King added: "It's crucial we don't lose sight of the fact that monetary policy is there to ensure steady sustainable growth for the businesses across the country, who provide employment to the people who live there."

He is the second senior figure in a week to attack the bonus system. Last week CBI boss Richard Lambert said such packages encouraged employees to run huge risks that have contributed to the financial crisis.

It is estimated that around £7.4 billion was paid out in bonuses for performances last year. This was down on the £8.8 billion record of the previous year but still the second highest. Around 4,000 bonuses of at least £1 million are paid each year with a few dozen " masters of the universe" - mostly traders at the top investment banks or hedge funds - getting £10 million or more.

Hundreds of partners at "magic circle" law firms and international accountancy firms can expect to get £1million plus in a good year.

The bonus culture has attracted tens of thousands of young workers from countries such as France and Italy to work in the dealing rooms and boardrooms of the Square Mile and Docklands. However, many investment banks, reeling from the scale of the sub-prime disaster, are now rethinking the way they reward key staff.

Unions and other critics have accused out of control traders of jeopardising the jobs of millions or ordinary people. Graham Goddard, deputy general secretary of the union Unite, said: "Unite members in the financial services are not those earning six figure salaries in the City, rather many are support workers earning under £15,000 per year. There must now be recognition of the insecurity felt within the industry by those who are battling through daily speculation and panic."