Shouldn’t the EU curb everyone’s bonuses?
Why are we picking on bankers? The European Union has tough new rules on bonuses paid by banks, but if the curbs are sensible, shouldn’t they apply to all businesses?
The EU rules will require about half of any bank bonus payment to be deferred for three to five years and half of any element that is paid immediately will have to be in shares in the bank. That should ensure that payment is made only once profits have been earned and the share price should reflect the bank’s future fortunes.
The EU expects national governments to implement new laws by January 2011 – so expect banks to bring forward their annual bonus announcements.
It was the banks that got us into this trouble of course. Except for governments that borrowed too much, consumers who took on too much credit and companies that overgeared – but they could borrow badly only in the banks lent badly too. But if curbing bonuses might have curbed the banks’ enthusiasm to take risks, surely the same principles apply to other companies too.
So why should not everyone from salesmen to chief executives have their bonuses deferred and paid in paper too? One mistake of the past three years is to think that banks are different when they are merely a particular sort of company. Applying the new bank rules to an oil company like BP could certainly be justified.
It would have been better if the EU had gone back to first principles and asked what bonuses are supposed to be about. Are they incentives to bring in business or profit-sharing schemes once the business is won.
Banks used them as an incentive to generate business – just like the commission paid to estate agents or sales reps – compared with private-equity firms that took a retrospective view and paid bonuses from realised profits. The bank bonus model encouraged bankers to take risks because they did not have to share in the downside.
However, if bonuses are intended as motivators, how incentivised will bankers – nevermind a salesmen – be to wait five years for their reward. If it is cash in hand that makes people perform, the EU plan to limit it to 20 or 30 per cent of the bonus removes most of the point of paying it.
And what of the extended bonus culture that pays sums simply for achieving some target that ought to be part of the job description – as through basic pay is for turning up in the office and any reasonable performance warrants extra payments. That is why banks are paying bonuses not only to the dealers who lost fortunes but to the tellers on the counters and why local authorities and the civil service supplement pay with spurious awards.
After the financial collapse there is a danger that banks will be over-regulated as the stable door is belatedly closed. The EU would be better served by trying to smash the culture that everyone, from top to bottom of an organisation, deserves a bonus however well they perform.
