Viewpoints: EU banker bonus cap
- 28 February 2013
- From the section Business
Bankers in the European Union face a legal cap on bonuses for the first time, as part of a package of measures designed to prevent another financial crisis.
Large bonuses were blamed for much of the reckless behaviour that led to the 2008 crisis.
Here, a number of politicians, bankers and economists comment on the announcement.
Sir Philip Hampton, chairman of Royal Bank of Scotland
In principle, it seems to me one of those things that seems a little bit late in the day to be tremendously effective... basically because bonuses have been falling, they've been falling at this bank more than many banks.
And to me it's a little bit the sound of stable doors. The bonus problem isn't solved, but it is a significantly less serious problem I think in banking than was the case a few years ago.
William D Cohan, investigative journalist and former JP Morgan banker
The European Union and the UK have been far ahead of the curve on this topic and the rest of the industry will follow this lead.
The market will force on the Wall Street firms based in New York, a reduction in compensation of the people who work there.
It is the only way these firms can make the kind of profits that their shareholders demand, and are demanding in the future.
Because, with higher capital requirements, a slower growth environment that we have in terms of the economy and investment banking services and trading services, the only way these firms can increase their return on equity is by cutting the compensation that they pay the people who work there.
It's already starting to happen in New York. It won't be mandated from government, I agree, but it will happen nonetheless.
Dr Peter Hahn, Cass Business School
Prescriptive legislation in banking often results in unintended consequences.
Since bonuses became part of the legal and regulatory agenda in 2009-10, many of the highly paid at global banks have seen their salaries triple, and this in a global downturn.
What could we see if we have a couple of good years? Remuneration consultants must already be working on flexible salaries and fixed bonus pay plans. But seriously, much of banking and economics are cyclical, and the basis of bonuses was to address cyclicality. Certainly, bonus payments lost that purpose, and need to be reoriented.
Yet, the current proposal appears aimed at ludicrously legislating the economic cycle and creating ever higher fixed salaries and perks for those leading the largest banks.
Those worried about Europe's growth might think about how high, fixed pay packages with limited upside might influence senior bankers to increase risk-taking or not.
Philippe Lamberts, Belgian MEP for the Green Party
They are necessary for two reasons. Firstly, the structure of remuneration is such that it encourages excessive risk-taking, especially in a system where "heads I win, tails the taxpayer loses".
This is something which needs to be curbed, and by reducing the leverage between fixed and variable pay, we believe that we reduce the incentive for excessive risk-taking.
Secondly the overall level of compensation in the finance industry is a very strong incentive to breaking the law, to crime.
There are a majority across Europe who want to do something to curb excessive bonuses… the system we are putting in place allows you to double or even treble your base salary, and gives enough space to devise incentive schemes so that people can really perform and be rewarded for performance.
It may be that some excessive pay will still be paid, and will need to be paid outside the EU jurisdiction, and yes that is a risk we need to bear… but I believe the upside far outweighs the potential limited downside of such a regulation.
Vicky Ford, British MEP for the Conservative Party
I do fear that a cap on bankers' bonuses is a blunt instrument, but I was pleased to sharpen it by including elements that encourage bankers to take long-term decisions. Otherwise they risk their bonuses being clawed back.
Of course, some top bankers will be affected by the bonus cap, but I feel that we have managed to produce a deal that will strike the right balance for the majority of bankers, who take responsible decisions.
If the bonus cap is shown to cause bankers to begin relocating outside the EU, then we will have the ability to swiftly look again at the provisions in place through an early review.
This has been three years of work, and it is by miles the most complicated piece of legislation that the European Parliament will pass. International banks do need international regulation, and the UK's banks have regularly told me that being part of the single market is vital to them.
We have tried to limit the unintended consequences of this legislation. We may not have got this 100% right, but I hope it is a step in the right direction.
Robin Chater, secretary-general of the Federation of European Employers (FedEE)
What EU negotiators have failed to appreciate is that such an action is beyond the powers vested in the European Union under the EU Treaty. Article 153 (5) of the Treaty clearly states that EU legislative powers shall "not apply to pay".
Furthermore, even if the Council's powers were not challenged in this matter, financial institutions would remain free to increase base salaries to reward and retain key staff.
What politicians and bureaucrats have always ignored is that high remuneration levels in the financial sector - and especially substantial variable payments - serve to minimise fraud levels, retain talent, drive high performance and encourage continuity of employment. That is why corruption is so rife in many states where senior banking staff are badly paid.
Many EU states have long coveted the City of London's success as an international financial centre, and regarded high bonus payments as its Achilles' heel.
This measure is therefore no more than an attempt to exploit the current vulnerability of the City, by riding on the back of the collective jealousy of bankers' pay in public opinion and the recent downgrading of the UK's international credit rating.
Arlene McCarthy, British MEP for the Labour Party, Vice President of the Economic and Monetary affairs Committee
I welcome the deal reached last night to toughen up bonus rules. In 2010, the EU put in place rules ensuring that bonuses were deferred, could be clawed back, and that cash bonuses were limited. The banks were told then to introduce a ratio between fixed salary and bonus elements.
The failure of banks to self-regulate on bonuses, or to exercise restraint, has now resulted in a bonus cap with a one-to-one salary-to-bonus ratio, which aims to put an end to the excessive risk culture which lead to taxpayer bail-outs and bank collapses.
These rules are designed to make banks safer, more accountable, and to ensure they focus on lending to the real economy.
It will put an end to an unsustainable banking model, where bailed-out banks with £5.2bn losses, £1.1bn fines for mis-selling, £390m fines for Libor-fixing, were still in 2012 paying over £600m in bonuses.
This is neither ethnical nor sustainable. The industry has had two years to sort this out, and their failure to tackle the culture has resulted in these tough rules.
It's a shame that the UK government has sought to defend this broken bonus culture by acting as the trade union for a minority of highly paid traders.