It’s bonus season. Cue impotent public wailing

Everyone agrees that many of these bonuses have not really been earned. Investment banks are enjoying this profitability because of the trillions in life support pumped into them by governments around the world. The public are furious and understandably so. So what methods could be used to curb these bonuses and why haven’t they been more effective?

1 Don the hairshirt This is the approach urged in particular by Gordon Brown and Lord Myners, the City Minister. Likelihood of success? Zero. You might just as well ask the lions of the Kalahari to give up on antelope.

Bonuses are not some peripheral side-effect of banking. They are at the very heart of it — the yardstick by which most who work in the City measure success. Satisfaction comes not just from the obvious financial benefit of a bumper bonus, but from the massage it confers on the ego.

Many City jobs are deadly dull. The reason to put in 12-hour days hunched in front of banks of screens is the bonus, which usually dwarfs base pay. The very rhythm of the City is set by the beat of the bonus season: March to July — work your socks off to justify a big pay-out; August to November — sit on your hands for fear of imperilling what you’ve already made; December — schmooze the boss to maximise discretionary element in bonus; January to February — kerching!

Senior bankers pay lip service to the idea of restraint. But they argue, with some justification, that they cannot do it alone. Stephen Hester, chief executive of Royal Bank of Scotland, told MPs last week he would pay as little as possible in bonuses, but had to keep paying to retain good people.

Effectiveness rating: 1/10 2 Tax them into submission The UK and the US have both opted for this. Alistair Darling is attempting to tax all bank bonuses above £25,000 at 50 per cent, with the employer footing the bill. The idea was to deter banks from paying bonuses; Mr Darling expected only to raise £500 million. He looks set to raise many times that amount as banks push on with bonuses regardless. J P Morgan alone expects to cough up £300 million.

The one-off tax could raise as much as a penny on income tax for a year. But it has two drawbacks. The minor one is that large chunks of the City have no idea whether they are liable — it all depends on how you define a banker. The uncertainty is doing London’s international reputation no good at all. Zurich and Singapore suddenly look much more attractive.

The bigger problem is that while some banks have responded — Credit Suisse is planning to cut bonuses by a third — others plan to dip deeper into reserves to pay the tax. Profits that would otherwise be tucked away to strengthen balance sheets are being diverted to the Treasury. In the event of another economic setback, Britain’s banks may have to turn to shareholders and taxpayers for yet more money. In that sense bonuses this year are the height of folly. But taxing them is not clever either.

Effectiveness rating: 2/10 3 Rewrite the rules The Financial Services Authority has put in place new rules requiring the bonuses of senior bankers to be phased over three years and for a large chunk of their rewards to be paid in shares, not cash. There are also clawback clauses to enable banks, in theory, to grab back rewards if the recipient’s perceived talent proves to have been illusory.

These are useful restrictions and may deter bankers from the most blinkered of gambles. But they do not go nearly far enough. Bank crises typically occur only once every 10 or 20 years. Large parts of the industry make their money picking up coins in front of a steamroller. Year after year, it is easy money; once in a generation, they get squashed. Nineteen successive years of profit is absolutely no good to long-term shareholders or to taxpayers if, in Year 20, the bank fails.

Effectiveness rating: 4/10 4 Wake up the shareholders The dog that hasn’t barked for much of the banking crisis has been the shareholders — the big institutions that own the banks on behalf of millions of ordinary pension-fund members and insurance policyholders.

As Lord Myners remarked, many of these institutions have behaved like absentee landlords, doing nothing to curb past recklessness and little to push for better pay systems in future. Banks have become ownerless corporations, accountable to no one, powered solely by the self-interest of their senior managers.

Even the mammoths of the investment world, such as Legal & General and the Pru, rarely own more than 2 or 3 per cent of any one bank. Aviva, the old Norwich Union, has voted against senior pay packets in 183 listed companies in the past year, but with only modest effect.

Collective action by shareholders has been timid. One wonders how sincere the institutional investors are about reforming banker pay. Many of the biggest fund management groups are owned by banks; almost all of them are beneficiaries of the same flawed bonus system — one that rewards short-term success and buys into the notion that financiers are hugely talented.

Shareholders should be the solution to the bonus problem. In fact they are self-serving agents who have become part of the problem.

Effectiveness rating: 2/10 Nothing is likely to stamp out the scourge of undeserved bonuses any time soon. Those with a heightened sense of justice should brace themselves for an emetic few weeks.

Patrick Hosking is financial editor