Luke Hildyard writes for the Shifting Grounds website on the EU bonus cap
The timing of the EU’s announcement of a cap on bankers’ bonuses could not have been better.
On a day that RBS confirmed £287 million worth of bonuses for its investment bankers, to sit alongside an annual loss of £5 billion, not even the most squawkingly Eurosceptic parts of the media had the chutzpah to break out their template diatribe.
In fact, the top rated comment on the Daily Mail’s story reads “the EU finally wants to do something useful and the clowns in Westminster want to stop it”. That probably just about captures the public consensus on the new regulations, even if it’s a bit harsh on the benefits of free trade, ease of foreign travel and a raft of social and environmental protections.
The new measures introduced by Belgian Green Party MEP Philippe Lamberts will cap bankers’ bonuses at 100% of salary, or 200% with the explicit approval of a shareholder vote.
First and foremost, this is intended as a solution to a problem that very much needs one.
The arguments about banker’s bonuses and executive pay are already familiar to most. They create soaring inequality, and all the attendant social problems; they encourage the kind of excessive risk that screwed up the global economy; and they don’t serve as any kind of useful performance incentive or proportionate reward.
So bankers pay needs to be limited, the question is whether these measures are the right way to do it.
Boris Johnson has already claimed that the changes will drive banks and bankers overseas. If anything the reverse is also true – there is huge public anger about the banks in most countries, and the EU’s action might encourage other economies to adopt stronger measures on outrageously unfair pay. For example, the Swiss are having a referendum this weekend on new executive pay laws that could see overpaid business leaders jailed, which somewhat diminishes Johnson’s point that Zurich will be one of the main beneficiaries of the bonus cap across the EU.
Indeed, the general argument that there is only a tiny pool of people capable of working in the banking industry (how bad would the financial crisis have been without all the top talent the sector is currently able to attract) and that they’re all super mobile, and happy and willing to move to New York at the drop of the hat, if there’s a bit more money in it, is one conspicuously lacking in hard evidence.
The suggestion that a bonus cap will only drive up base salaries is more problematic. Since 2007 and the sudden increase in public anger about bonuses, variable pay for bankers across Europe has declined by 55%. Basic salaries have increased by 37%. So there are grounds to think that this phenomenon might intensify once legal measures are in place.
But firstly, it’s important to note that this isn’t some kind of law of nature. Basic pay has increased as bonuses become politically unacceptable because of a conscious decision by banks. They could just as easily pay their employees less. Pressure from politicians, the media and campaigners might encourage them to do so, when the new regulations come into force.
Secondly, the fact that bonuses are supposedly performance-related – despite the fact that they are a near-guaranteed part of pay packages, and most evidence suggests they do little to improve performance – is used as political cover for banks to justify enormous pay packages. With this gone, it would be difficult, hypocritical even, for them to compensate for lower bonuses with even higher basic pay. Shareholders too, are less likely to approve of high awards that don’t even have a notional relationship performance.
Nonetheless, the risk of bonus payments transferring to basic salary is one clear concern over the new measures. Another is whether a cap on bonuses goes far enough.
The threat that the cap poses to the economy is grossly exaggerated, and it would exert significant downward pressure on the outrageously excessive pay awards still flying around in the financial services industry. But given the extent to which bonuses have been discredited, the growing concern around inequality, and the increasing recognition that wealth is created collectively, rather than by a few superstar individuals, don’t these new regulations represent something of a half-measure?
The High Pay Centre would argue for a ‘scrap them, don’t cap them’ approach – ban all bonuses, and replace with an employee-wide profit sharing scheme. That should be the ultimate objective, across the UK, EU and internationally, as part of an economy that serves the common good. While that remains a longer-term ambition, the proposals from the EU are a step in the right direction.
(this article initially appeared on Shifting Grounds)