As readers of this blog will know I am not an advocate of complex regulation. It leads to problems. Bonuses are no exception. In a move to stem short term risk taking, regulators now prefer vesting share based compensation with claw backs. This is opaque.
Each bank has a relatively few individuals who run things and like it or not they get well paid. Look at any remuneration committee report and try and figure out how it works. Share based remuneration is often highly dilutive and is wealth damaging to shareholders. As for claw back, it won’t happen.
No wonder that many successful investors shun banks. It’s hardly a recipe for a successful government exit.
As a supporter of the free market I find myself surprisingly in agreement with EU law restricting bonuses to 100% (or 200% with shareholder approval) of salary. Even if salaries are increased it’s transparent and makes expensive staff liable to be culled particularly if they don’t produce, (something that can get lost in share based vesting comp. which to some almost seems like free money).
EU caps are a blunt instrument but bankers have been lucky. Other state supported enterprises with the notable exception of farming have been let go when their markets or businesses failed. The only reason why this time it didn’t happen was because at its core banking is a utility.
Bankers explain success in terms of their expertise. This is partially true. But make no mistake the main reason why many banks make money is not employee expertise per se. It’s a combination of things in which barriers to entry, access to central banks and shareholder capital play important roles. Indeed these factors are so crucial that bankers resist ring fencing and on the whole prefer not to set up shop on their own.
What’s the answer?
The faster ring fencing takes place the better. Bankers can then choose. Do you want to be in a safe, regulated utility business with a fixed salary or do you fancy a flutter at the casino with all the personal risk that involves and yes bonuses if you are good (or lucky).
Until then tax payers' interests are better served resisting payouts. After all some banks fall at the first hurdle. They don’t even make a profit. Â
What happens when all the hard done to dealmakers shuffle off to Goldman to get paid more? We should be reminded of similar threats in 2008 about leaving the UK. They were idle too.
In footballing terms do second division players join Manchester City?