Tuesday, 7 December 2010

Government interference in bankers bonuses

I may be a bit early on this item, since the Committee of European Bank Supervisors (CEBS) is not due to publish its rules on bonuses until Friday 10 December. But the Times reports that they are due to set a 20% cash limit on bonuses, 20% in shares that cannot be sold for some time and 60% deferred for several years.

Now, I understand that governments and regulators are eager to discourage bank staff from taking huge risks in order to achieve huge bonuses. But…put aside the anecdotes and the outrage against people earning lots of money…does the evidence show that large short-term bonuses were a causal factor in the banking crisis? And are these proposed rules limited to those who could possibly take actions that cause economic harm in pursuit of bonuses?

Don’t misunderstand me, I am as outraged as the next man at people earning vast sums that seem unrelated to their contribution to society. But if the motivation is jealousy then what about footballers and lawyers and film stars and lottery winners? And is it the job of government to interfere in freely negotiated wages? I am worried that governments that should lead are reacting to the news agenda and not taking rational decisions. The economic stupidity of raising UK marginal tax rates to 50% still irritates me. And will the regulations work anyway or will ways be found around them or, worse, will these banking activities migrate overseas? Banks have been slanting remuneration more towards basic salary and less towards bonuses for two years now anyway. Beware populist measures that have unintended consequences.

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