Ben Chu: Special pleading from a sector which still thinks it exists on a different planet

Ben Chu
Friday 01 March 2013 00:15

Outlook Some people have scrubbed themselves into an impressive lather over the European Union's new legislation to cap bankers' bonuses as a proportion of salary.

"This is possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire," proclaims the Mayor of London, Boris Johnson, whose fondness for a classical analogy is matched only by his tenderness towards his high-earning friends in the City.

The cap is "highly dangerous", warns Mark Littlewood, the head of the libertarian Institute of Economic Affairs think tank.

Even the normally sober Financial Times columnist John Gapper informs us that the cap, along with other recent European Union moves on financial regulation, represents "an existential threat to the City".

We're told that this ill-conceived cap will prompt an exodus of UK banking talent, perhaps even the relocation of entire banks. And those that remain will jack up their employees' base salaries, hiking their fixed costs and making them more vulnerable in a downturn. The whole project is denounced as a monstrous throwback to the 1970s, when politicians set distorting and inefficient private-sector pay curbs in a futile attempt to control inflation.

Yet it seems to me that the intensity of the hostility this measure has provoked in Britain is in inverse proportion to the quality of the objections.

Consider the proposition that talented bankers will scarper to places where they can escape the cap such as the Far East, or Switzerland. If that sounds familiar, it is because it is a threat that has been wheeled out again and again since the 2008 financial crisis. We hear it whenever a politician or regulator dares to propose a new reform or tax for the sector. It is surely a miracle that there remains a single employee left in the Square Mile today given how abominably these individuals have been treated by politicians and regulators. Expect this latest alarm bell to be as bogus as all the rest.

Then there's the objection that the cap will inevitably result in a jump in fixed pay and thus prevent banks slashing costs in a crisis. This is spurious on several levels.

First, we might note that during the worst financial crisis in a century, payouts to staff proved remarkably inflexible. Banks announced multibillion-pound losses, yet bonuses were still handed over as if the good times were still rolling.

In 2008 Royal Bank of Scotland reported a £24bn loss, the biggest in UK corporate history. But its aggregate staff costs were little changed on the previous year. That same year Barclays was forced to go cap-in-hand to Middle Eastern investors to raise £7bn in emergency capital after recognising huge losses on dodgy investments. But total staff costs for the group barely budged. And the next year they shot up by 40 per cent, after the bank snapped up Lehman Brothers' New York trading operation.

We're told things have changed now, that bonus "clawbacks", deferrals, and share-based awards have revolutionised the system. One would be hard-pressed to guess this looking at the £5bn loss from RBS and the bank's simultaneous unveiling of a £600m bonus pool.

Second, the bonus defenders also seem to have missed the fact that bankers' fixed pay has gone up anyway since the crisis, as managers have sought to protect total remuneration levels in an environment of dwindling revenues. Those now wringing their hands about the prospect of banks' fixed costs rising seem to have been remarkably relaxed about that existing trend.

In any case, the notion that cutting bonuses is the only way that banks can rapidly reduce costs is nonsense. If managers need to make economies in adverse times they can always do so by firing people. It's not pleasant, but it's what every other industry under the sun does.

What we're hearing here is special pleading from a sector that, despite everything we have gone through in recent years, still seems to believe it exists on a different planet from the rest of the population.

Most of us receive a salary for our work. Those of us lucky enough to get a bonus will find it is considerably smaller than our salary (without regulation needing to keep it within those bounds). Just what is so special about banks that their employees must be eligible for bonuses worth many multiples of their base salary? Why does this industry's pay structure need to be so radically different from that of any other?

So come on, you bonus defenders. Give the apocalyptic rhetoric a rest and explain the reason to us: we'd love to hear from you.

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