Banks will be punished with higher taxes if they award huge bonuses in the next few months, Liberal Democrat ministers warned yesterday.
Today Vince Cable, the Business Secretary, will float the idea of giving shareholders more power to curb excessive pay packages for all company bosses.
In his speech to the Liverpool conference, he will announce that a review of executive pay and takeovers will be launched next month. It could result in legislation aimed at forcing company boards to behave more responsibly and "advisory votes" by shareholders on remuneration packages to put pressure on firms to show restraint.
The Coalition Government has already announced a levy on banks' balance sheets from January, which will eventually raise £2.5bn a year.
Yesterday's sabre-rattling suggests that the Coalition may extend the one-off 50 per cent tax on bank bonuses of more than £25,000 announced by the previous government last December. That would cause anguish in the City of London, and provoke renewed warnings of an exodus of firms.
Before leaving the Liberal Democrat conference to attend a United Nations poverty summit in New York, Nick Clegg said ministers would not stand "idly by" if banks handed out "unjustified" bonuses.
The Deputy Prime Minister told BBC Radio 4: "I think it would be not in their interests at all, socially or economically, for them to be starting to award themselves [big bonuses]."
Mr Clegg went on: "It is very important that the banks understand that you cannot possibly award yourself ludicrous sky-high bonuses in an industry that has been bailed out by the taxpayer when those same taxpayers are now having to make very serious sacrifices in their own lives... that will appear almost gratuitously offensive."
Mr Cable warned bankers that they would face a "train crash" if they award themselves huge bonuses, but admitted that the Government was braced for a public and political outcry over the next round of handouts.
The Business Secretary warned: "I don't think the banking community should assume that the Government doesn't have any potential sanctions, because it does."
He said regulation could be used to ensure disclosure of bonuses and added: "Potentially there are quite tough sanctions in terms of tax policy." If banks showed they had lots of money to spread around in dividends and bonuses, "then the Government may have to use some form of taxation to change their behaviour". That could mean an increased tax on profits, or looking at a tax on financial transactions – although the latter would almost certainly only be done as part of an international agreement.
In his speech on the final day of the Liberal Democrat conference, Mr Cable will declare: "The principle of responsible ownership should apply across the business world. Let me be quite clear. The Government's agenda is not one of laissez-faire. Markets are often irrational or rigged. So I am shining a harsh light into the murky world of corporate behaviour."
He will add: "Why should good companies be destroyed by short-term investors looking for a speculative killing, while their accomplices in the City make fat fees? Why do directors forget their wider duties when a fat cheque is waved before them? Capitalism takes no prisoners and kills competition where it can."
The Business Secretary's consultation exercise will consider whether companies should be under a greater obligation to behave responsibly – both on pay and in their actions more widely. It is designed to address concerns illustrated by the BP oil spill in the Gulf of Mexico and the Kraft takeover of Cadbury.
The review will consider the growth of "short-termism"; how to make boards set out their objectives more clearly; give shareholders greater opportunities to influence the strategy and look at directors' wider duties during takeovers.
A separate consultation by the Takeover Panel is already underway.
Bosses reacted with scepticism to Mr Cable's attack last night. Richard Lambert, director-general of the Confederation of British Industry, said: "Of course Mr Cable is right to say that the principle of responsible ownership should apply across the business world. But it's odd that he thinks it sensible to use such emotional language.
"The case for corporate takeovers is that they allow control of poorly run businesses to pass into more efficient hands. Mr Cable has harsh things to say about the capitalist system: it will be interesting to hear his ideas for an alternative."
What the Lib Dems want – and what they will get
What the Lib Dems say: "Next year 900,000 low-income workers won't pay a penny of income tax, a major step towards our manifesto pledge to make the first £10,000 you earn tax-free" – Treasury Chief Secretary, Danny Alexander.
What they will get: £1,000 rise in personal tax allowance to £7,475 a year. But progress towards the £10,000 goal is dependent on resources.
What they say: "We will not repeat the mistakes of the 1980s in which whole communities were hollowed out" – Nick Clegg.
What they will get: A £1bn regional growth fund to ease the impact of cuts in public sector-dependent areas. But experts warn the cuts will be regressive.
What they say: "We are concerned by the establishment of free schools... Local authorities should retain strategic oversight of the provision of school places funded by the use of public money" – Lib Dem conference motion passed.
What they will get: Although Lib Dem councillors may try to frustrate them, free schools will still go ahead.
What they say: "Issues which are important to us... scrapping tuition fees" — Simon Hughes, Lib Dem deputy leader.
What they will get: Lib Dems favour higher tax payments by graduates, but have not yet persuaded the Tories, who want fees to rise. Review by former BP boss Lord Browne reports next month.
What they say: "If the banks pay themselves unjustified bonuses, we reserve the right to take very serious action on that" – Nick Clegg.
What they will get: Final decision rests with Chancellor, George Osborne. Will depend on the scale of bonuses announced in the next few months.
What they say: "The kind of technology and hardware that we acquired in an era of Cold War conflict... the role has changed... and that needs to be reflected in the kinds of things that we spend money on" – Nick Clegg.
What they will get: Lib Dems oppose the Tories who are committed to renewing Trident. Final decision may be delayed until 2015, after the next election.
What they say: "We have to win the argument that simply banging up more and more people and pushing them through the revolving door of the prison system is self-defeating" – Lord McNally, Lib Dem Justice minister
What they will get: Justice Secretary Ken Clarke is sympathetic, but some Tory MPs believe it would make the Tories look soft on law and order.
What they say: "It is simply unacceptable that so many people feel their vote does not count" – Simon Hughes.
What they will get: A referendum on bringing in the alternative vote system is due in May. But the Tories are free to campaign for a "No" vote.
Prisoners gaining right to vote
What they say: "There needs to be a change to the current situation, but we don't support the blanket rights of prisoners to vote" – Clegg spokeswoman.
What they will get: Tories unconvinced.
What they say: "Conservative social care plans are unworkable, unfair and unaffordable for the majority of pensioners" – Norman Lamb, chief Parliamentary aide to Clegg
What they will get: Probably the Tories' £8,000 voluntary insurance scheme to cover residential care costs.
By Andrew Grice, Political EditorReuse content