Editorial: A cap on bank bonuses will not solve anything

Plans to limit pay deals smack more of vengeance than of competent policy-making

Share
Related Topics

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.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: IT Support Technician

£14000 - £17000 per annum: Recruitment Genius: You will work as part of a smal...

Recruitment Genius: Media Sales Executive - OTE £37,000

£16000 - £37000 per annum: Recruitment Genius: The ideal candidate will want t...

Recruitment Genius: IT Support Technician / Helpdesk - 2nd / 3rd Line

£22000 - £25000 per annum: Recruitment Genius: IT Support Technician is requir...

Recruitment Genius: Application Developer

£20000 - £28000 per annum: Recruitment Genius: Based in the centre of Glasgow,...

Day In a Page

Read Next
 

Fifa 16: Including women's football teams is going to improve the game, not break it

Mollie Goodfellow
 

For the sake of the millions of girls who miss vital schooling during their periods, we must dismantle the 'menstrual taboo'

Emily Wilson Smith
Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

The ZX Spectrum is back

The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

Even the screenwriter pours scorn on Grace of Monaco biopic

The critics had a field day after last year's premiere, but the savaging goes on
Menstrual Hygiene Day: The strange ideas people used to believe about periods

Menstrual Hygiene Day: The strange ideas people once had about periods

If one was missed, vomiting blood was seen as a viable alternative
The best work perks: From free travel cards to making dreams come true (really)

The quirks of work perks

From free travel cards to making dreams come true (really)
Is bridge the latest twee pastime to get hip?

Is bridge becoming hip?

The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
Long author-lists on research papers are threatening the academic work system

The rise of 'hyperauthorship'

Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

The rise of Lego Clubs

How toys are helping children struggling with social interaction to build better relationships
5 best running glasses

On your marks: 5 best running glasses

Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

'Ben Stokes gives everything – he’s rubbing off on us all'

Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

Please save my husband

As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada