The Edge

Richard Northedge takes on corporate finance

Capping bankers’ pay may backfire

Bankers are clever at manipulating figures. If the European Union says bonuses can’t be bigger than basic pay, they are likely to increase their basic rather than decrease the bonus.

There may be common consensus that both basic pay and bonuses are too high, but banks still seem to think they have to pay to attract staff from other financial institutions that overpay. If that’s the market, the EU’s proposed new rules won’t change it.

In a nonsensical world, there is some sense in keeping bankers’ basic pay to relatively low levels – perhaps less than £1m – while allowing bonuses to fluctuate to reflect the individuals’ success. In bad years the banker scrapes by on his basic but the bank’s cost base tumbles: in good years the banker shares in the profits. It’s not so different to the commission paid to other useful members of society such as double-glazing salesmen or estate agents.

Limiting bonuses to a maximum of the salary (or twice basic if shareholders give specific approval) loads the employer with more fixed costs and less flexibility.

But the real question is why we are still singling out bankers for pay control when any other employer can pay its employees as much as it wants. After levies on bankers’ pay, we now face limits on their remuneration – despite UK government objections.

The last group subjected to maximum pay was professional footballers. Once the £12 a week limit was ended their remuneration rocketed to levels that make bankers look like paupers – bankrupting football clubs and sports television channels along the way. Maybe that will be the EU’s next ridiculous target?

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