(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Chris Hughes
LONDON, Feb 19 (Reuters Breakingviews) - If Europe wants to
hard wire excess pay for bankers, it is going the right way
about it. Proposals to set a maximum ratio of bonuses to salary
are so manifestly counterproductive that it’s hard to believe
they have gained almost unstoppable momentum among European
Union members. Bad policy is what happens when weak management
in the financial industry collides with the politics of envy.
Investment bankers are overpaid. The rewards in banking are
still way beyond those available in other industries. This is
partly because investment banking is an oligopoly: a handful of
big global firms control the pathways of international finance.
It's also because the business enjoys an indirect taxpayer
subsidy in the form of bailouts when things go wrong. And in
some parts of finance - notably advising on deals - clients will
pay top whack to have the very best person on their side.
But capping bonuses is not the answer. It would make matters
worse. Such a policy would cause further inflation in base
salaries – a phenomenon already under way following post-crisis
curbs on cash bonuses. And cutting handouts relative to base pay
means there would be less deferred compensation to be clawed
back in future if trades blow up or bad behaviour is discovered.
Fixing the problem of excess pay requires lowering banks’
excess returns. After paying their employees, banks' main
expense is servicing equity capital, the cushion against losses
provided by shareholders. If banks hold more capital, the cost
of providing investors with a decent return would leave less to
distribute as bonuses. This process has already started, though
shareholders need to be more muscular. So-called living wills,
which should make it possible for banks to fail safely, will
help remove the taxpayer subsidy. Where competition is weak,
governments should legislate to increase it – or impose higher
Britain is lobbying hard against the EU’s proposals.
Unfortunately, perceived self-interest in protecting the City of
London, twinned with the prevailing scepticism about the UK in
the rest of Europe, render it a weak advocate. Banks have also
singularly failed to make a credible counter proposal. The
result will be precisely the opposite of what was intended -
more cash for bankers.
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Wrong again [ID:nL3E8FD7ME]
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click on [HUGHES/]
(Editing by Peter Thal Larsen and David Evans)
Keywords: BREAKINGVIEWS BONUSES/
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