City bonuses will plummet by 40 per cent this year as turbulence in the credit markets begins to hit the pockets of London’s high-earners, a British think-tank said yesterday.

In its biannual report on London’s economy, the Centre for Economics and Business Research (CEBR) predicted that this year’s bonuses – to be paid in early 2009 – will total £5.07 billion, down from 2007’s near-record £8.51 billion payout. In 2006 £8.8 billion was paid to London’s financiers. “[Our] research suggests that the pin-striped brigade will feel it in their pockets for some time to come,” the CEBR said. Bonuses would not recover until 2011, when the CEBR forecasts a £9.04 billion total.

Last week Mervyn King, the Governor of the Bank of England, hit out at bankers’ salary packages. Mr King told the Commons Treasury Select Committee that the remuneration structures in some banks had encouraged a dangerous level of risk-taking that had helped to push the world into a liquidity crisis.

“Banks have come to realise they are paying the price for having designed compensation packages, which provide incentives that are not, in the long run, in the interests of the banks themselves,” he said.

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Alistair Darling has also spoken out over the huge bonuses being awarded to City executives during a period of economic uncertainty. The Chancellor said that banks’ boards should apply the “next-door neighbour test” to judge whether payouts would be regarded as excessive by the man in the street. He said: “Boards need to ask themselves ‘Are we behaving reasonably?’. If you’re leaning over the fence talking to your next-door neighbour, can you justify what you’ve done?”

The CEBR said yesterday that it expects financial companies to change the way in which they calculate bonuses, adding that hedge funds would be most affected.

Dominic Walley, the CEBR’s managing economist, said: “Don’t expect City bonuses to bounce back. There is a strong perception that bankers have been rewarded for getting it wrong.”

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