Margareta Pagano: Diocletian needn't worry us, but Henry VIII should

The flawed, but rather good, EU proposal to cap bankers' bonuses could lead to a European rupture akin to the Tudor king's fallout with Rome

Here's a heretical thought for you; as a way of controlling bankers' pay, isn't the EU's plan to cap bonuses actually a rather good one? You wouldn't think so from all the hot air that is now steaming out of the City and, interestingly, from politicians of all persuasions but that's because of a visceral hatred of being told what to do by anyone, let alone European bureaucrats.

Here's why it's a better idea than at first glanwce. What the EU is suggesting is that the banks should make sure that the variable pay – the bonus – part of the package they pay to staff is limited to their salary at a ratio of 1:1. However, this can be raised to a 2:1 ratio or even higher with shareholders' approval.

Such a plan could introduce more transparency into how bankers' are paid and could benefit the industry long-term. So far, most of the opposition to the cap is that fixed costs will be pushed up because banks will pay staff more to make up for less bonus. Is that such a bad thing? If the top risk-takers in a bank are so good, why wouldn't the bank pay a higher base or maybe more in commission?

You could argue that higher fixed costs will make the banks take smarter decisions about the staff and keep a closer eye on their activities. For the problem with variable pay is that the risks shared by the bank and the employee are asymmetric.

Bad bets taken by the individual can cost the bank a fortune in losses but cost the employee nothing. Good bets are always favourable to the employee because he or she has a built-in bias towards taking risk.

Investment banks will always be highly cyclical. In good times, employees earn astronomical pay; typically total pay has been 60 per cent or more of overheads. This didn't matter when investment banks were run as partnerships but now most are part of retail banks. Old habits die hard and the investment bankers continue to earn too much as the bonus figures from RBS and Lloyds showed last week; even though the banks lost money.

So the EU's new proposal strikes right at the heart of this conundrum; how to balance risk and reward more fairly. Yet it's a flawed plan: the EU shouldn't be able to tell companies in the UK – or in any other country for that matter – how much to pay their staff either here, or in overseas offices such as New York or Singapore. How they must be rubbing their hands.

The UK is partly to blame. If investors had been quicker to lobby the bosses of banks to cool down sky-high bonuses after the crash, we might not be in this mess. If George Osborne and his Treasury team had been sharper in their diplomacy behind the scenes we might have won over more of our allies such as Sweden and the Netherlands to help negotiate a better deal.

Once again, the UK's diplomatic skills have been shown to be wanting when it comes to managing our European affairs. If the proposal does go through, the City – as big as all the financial centres in the EU put together – will lose some business. But the more lasting impact is likely to be on our relations with Europe and it will be intriguing to see how George Osborne gets on at this week's finance ministers' meeting.

Boris Johnson, London's Mayor, described the plan as the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire. It could prove worse than that: Henry VIII broke with Rome over a Queen's head.

Who knows, maybe this time it's a bankers' cap that triggers the UK to up sticks and march out of Europe once again.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee