Executives line up to waive bonuses as politicians scramble for credit

António Horta-Osório, Lloyds Banking Group chief executive set the trend of executives waiving their bonuses. Photograph Micha Theiner/City AM / Rex Feat

"We will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector." The Conservative party has not traditionally been seen as a scourge of business, but when David Cameron and Nick Clegg unveiled their coalition programme, this pledge was virtually the first in the document.

Almost two years later, is it possible that a change has been wrought? First António Horta-Osório, the chief executive of Lloyds Banking Group, decided to waive his 2011 bonus, followed by Stephen Hester at theRoyal Bank of Scotland and Sir David Higgins at Network Rail. All three organisations are wholly or partly dependent on the taxpayer – and Hester and Higgins were under intense political pressure to forgo their money – but on Thursday, when Tom Albanese, the boss of London-listed mining group Rio Tinto, waived his bonus too, questions were being asked about whether such sacrifices had spread well beyond the public sector.

Except that Albanese waived his bonus for a very specific reason: a takeover had not gone as planned – the bid for aluminium producer Alcan – and forced the company to take a $9.3bn (£6bn) charge. Rio, which incurred pay protests from shareholders in 2010 and 2011, was no doubt mindful of the risk of another protest at an annual meeting – as evidenced by remarks from Ivor Pether, senior fund manager at Royal London Asset Management on Friday, who hit out against the remuneration committee, which sets bonuses. "The onus should really be on this committee to exercise its discretion and withhold bonus awards when there is deemed to be strong justification for doing so, rather than relying on the integrity of the executives to step up to the plate," said Pether.

And attempts by Barclays to demonstrate pay restraint on Friday – arguing that bonuses were down 48% for executives and its eight highest-paid employees – also backfired.

But according to the Treasury, shrinking bonuses are a trend. The City bonus pool is forecast to be £4.2bn for 2011-12, compared with £6.7bn in 2010-11 and £11.6bn in 2007-08. And as part of Project Merlin – the "armistice" between the government and the banks that traded promises on tax stability for assurances on pay and lending – banks agreed to show "responsibility" and to make bonus arrangements more transparent.

"We are not going back to the days when bankers received bonuses worth hundreds of thousands of pounds in cash when no one knew what risks they were taking," says a Treasury source.

The Treasury is not the only institution claiming some of the credit for bonus restraint. "We believe that the work that Compass, and the work that the high pay commission did, have transformed the national debate," says Gavin Hayes, general secretary of Compass, a leftwing pressure group that used to be better known for its idealism than its influence in the corridors of Whitehall. But Compass set up the independent high pay commission, which published a report last year. Clegg praised it lavishly and many of its recommendations were accepted when Vince Cable, the business secretary, announced plans to control executive pay last month. "The High Pay Commission has set a direction of travel that all the parties have, in one form or another, adopted," says Hayes.

Up to a point. Ed Miliband, who claims ownership of the "responsible capitalism" agenda, has accepted all 12 of the commission's conclusions and has criticised Cable for not backing its call for workers to be included on remuneration committees.

In a speech this weekGeorge Osborne, the chancellor, took a veiled swipe at Labour by attacking those "trying to create an anti-business culture in Britain". Miliband retaliated on Thursday, after Downing Street said it would not be commenting on the forthcoming Barclays bonus payments, by saying: "Some argue that it is not business of the public what bonuses banks pay. I fundamentally disagree."

But Labour and the government have both put transparency at the heart of their strategy for curbing bonuses and some believe the gap between the two sides on this is rather narrow. "It's more a difference of rhetoric," said one expert in this area at a big City organisation who asked not to be named. "Clearly there nuances where the policy is different, such as whether you have employees on remuneration committees, but in my view that's the type of measure that would not make much difference."

Project Merlin may have done something to curb bonus payments, but even at the Treasury, sources admit that City firms are also responding to public pressure. "In the past 18 months attitudes to executive pay have hardened, because people now recognise what a difficult economic environment we are in," says Deborah Hargreaves, the former Guardian journalist who chaired the high pay commission. She cites recent research showing that only 7% of people think that a FTSE 100 chief executive should be paid more than £1m a year; in fact, the average is £4m.

In the City this has not gone unnoticed. "I think everyone is aware of the sensitivities around pay at the moment," says Robert Talbut, chief investment officer at Royal London Asset Management and chairman of the investment committee at the Association of British Insurers, whose member companies are major stock market investors. He thinks attitudes to bonuses are changing for good.

"While some may take the view that is temporary, others believe this as a permanent change in the environment. Some people are hoping that improving economic growth and markets will cause everyone to forget about it. I think this is an incorrect view and that remuneration is going to remain a sensitive topic which has the potential to continue to damage the standing of companies," says Talbut.

Others are more sceptical. "What has undoubtedly changed is public perception," says Roger Barker, head of corporate governance at the Institute of Directors, which last year said that the reputation of British business was "significantly damaged" by pay packages not linked to performance. "It was public opinion that put pressure on [people like Hester]. But whether the underlying attitudes of executives who are working in these large companies have changed is as yet unascertained," he says.

John Philpott, chief economic adviser of the Chartered Institute of Personnel and Development, is also cautious. "There is nothing in the system about preventing a return to [business as usual]. There doesn't seem to be any political momentum for that to change. I don't see anything in the proposals that the government is bringing forward, as they are still talking misguidedly about pay being related to performance."

Philpott says that after the banking crisis of 2008 the markets were hit by "doom and gloom about the end of capitalism". But soon there was a return to business as usual, with the phrase "BAB" – bonuses are back – soon echoing through the City.

Cable suggested he was accepting 10 out of 12 of the commission's recommendations, but many he accepted only "in spirit". Hargreaves says that the three core proposals – dramatic simplification of pay, workers on remuneration committees and a permanent high pay commission – were ignored. "We still think there's some way to go," she says.

The coalition promised to tackle "unacceptable" bonuses. But what's "unacceptable" still remains undefined.