At first glance, EU parliamentarians’ push to curb bankers’ bloated pay looks like a cause for celebration. If all goes according to plan, as of next January banks will no longer be allowed to give out a bonus worth more than the employee’s annual salary. In exceptional circumstances, explicitly sanctioned by shareholders, the ratio might rise to 2:1, but never beyond.
Quite a coup, it would seem: detested bankers are hit where it hurts, banks’ finances are made more stable, and a shred of power is reclaimed from the unaccountable speculators who hold the economy in their untrustworthy hands. If only it were so simple. While the proposals undoubtedly make for great populist tub-thumping, back in the real world they work neither in principle nor in practice.
First, the principle. It is not the job of central government, either in Brussels or in Westminster, to set remuneration policy in a commercial industry. Questions of systemic importance and moral hazard change nothing. True, taxpayers were forced to bail out too-big-to-fail banks all-but ruined by the recklessness of some of their star turns. But to imagine that paying bankers less – and, even then, only in Europe – automatically results in a stable banking system is to misunderstand the nature of the problem. There were any number of causes of the financial crisis. Mis-directed incentives were certainly one of them. But the issue was what they were designed to encourage, not the incentives themselves. To bring the blunt force of the law to bear on bankers’ wage deals is, therefore, to confuse the means and the end.
Next, the practicalities. For all the squealing from bankers, it is unlikely that pay will fall. Why? Because banks will merely inflate annual salaries to take account of dwindling bonuses, creating complex deals that conform to the new rules yet leave remuneration much as it was. Meanwhile, the link between pay and performance is made more tenuous still – quite the reverse of what many anti-bonus campaigners desire.
There is also the competitive impact to consider. The concern is not so much that newly squeezed talent will instantly emigrate to New York or Singapore. Indeed, recent surveys suggest that executives in all industries are less mobile than their tax-us-and-we’ll-leave rhetoric implies. Over the longer term, however, such factors will weigh – both on individuals’ career choices and on banks’ decisions about where to locate their operations.
None of which is to suggest that bankers’ pay is not too high or that there is not more to be done to address the industry’s free-wheeling culture. But some progress has been made, in beefing up national regulators, say, and boosting banks’ capital ratios. A bonus cap, however, smacks more of vengeance than of competent policy-making. Worse, the City of London, and with it the British economy, is squarely in the line of fire.
Most concerning of all are the implications for Britain in Europe. So far, the cap is provisional only, pending next week’s finance ministers’ meeting. Although it is possible for the Chancellor to vote No, he will want to avoid being out-voted on a policy affecting a strategic UK industry. Most likely, then, the focus will be on complex exemptions that can then be hailed as a victory. It is not. Regardless of tweaks, the central axiom of a bonus cap has already been conceded. Efforts to rally support behind the British position failed. What remains is a mistaken policy that will, at the very best, have little effect at all. That it exists at all augurs badly for the attempt to square the interests of the City with the European banking union. And this is only the beginning.