online-banking-2The UK once again finds itself at loggerheads with EU policy, and this time our flag bearer is none other than the infamous George Osborne, the chancellor that columnists love to hate.

The new bankers’ bonus cap would seek to limit bonuses to a year’s salary, bringing an end to the façade of current pay-outs up to 12 times an employee’s base wage. This would, of course, hit the UK’s financial sector the hardest, which is no doubt the reason why Osborne found himself outvoted 26-1 at a meeting of the European Union’s finance ministers. Rightly so, you might say. The extortionately overpaid banker stereotype is ubiquitous and, ironically, this stigma is simply contributing to the problem. Jon Terry, partner at PricewaterhouseCoopers and banking pay-level advisor, claims this so-called ‘banker-bashing’ is responsible for a reticence among graduates to work in the City. Investment banks are forced into higher incentivisation than ever, with a 5% rise in starting salaries in 2012.

The value of the principle, then, is becoming increasingly obvious. There is a need to curb the growth of this disparity between professions that are not so very different. Yes, we entrust bankers with our safety, financially speaking, and their role requires a degree of intelligence, but this is not a unique position. It would be easy to argue that medicine or engineering requires as much intelligence and serves as important a function. The salary of the average banker far surpasses their practical value for civilized society. In principle, capping a banker’s bonus is almost morally obligatory, but in practice? In practice, it is quite a different story.

We have seen in the past that talent follows money; more progressive taxes lead to costly emigration as highly paid professionals take their services elsewhere. Won’t this initiative breed the same fruit? Sony Kapoor, managing director of the Re-Define think tank, thinks no. With legislation implemented at an EU-wide level, bankers will have to go some distance to escape it. He supplements his assertion, however, with this claim:

‘This will help tackle the culture of excessive risk-taking and the bending of rules that has now become endemic to banking.’

I cannot but agree with him that risk-taking has become endemic. But if the prospect of financial reward is the motivation for this behaviour, capping bonuses will not prevent it. There are other ways to financially reward employees. Joe Rundle, head of trading at ETX Capital, told the BBC that banks will simply “drive up fixed salaries to compensate”. There is little doubt here. If nothing else, we must concede that bankers possess a certain shrewdness, and they will inevitably exploit this loophole. This can only result in one of two problems.

The first, as Simon Lewis, CEO of the Association for Financial Markets in Europe, affirms, is that banks will become less competitive. With a more consistent base wage, bankers will feel a new security in their positions and, with it, an accompanying loss of drive. Amongst an already over-cautious public, we will have gained just another group of nine-to-fivers, doing little to bolster the economy. Personally I find this difficult to imagine. Even disregarding the typical tendencies of aspiring bankers, I suspect that current risk-taking is motivated largely by the carrot and that, if anything, the stick actually deters some bankers from potentially dangerous decision-making. At least up until now we have had both! Therein lies the second problem. Robin Bew, Chief Economist at the Economist Intelligence Unit, summed it up in a simple tweet:

“EU legally caps banker bonuses. Popular, but counterproductive? Likely to push up salaries & reduce variable pay. So less skin in game.”

Bankers have been playing a dangerous game with the money of others, but at least their own welfare has also been on the line. Now, without the threat of losing their bonus, what is there to lose? The carrot is as real as ever, with the eyes of greed and ambition on a potential pay rise, but the stick is gone. It is much easier to withhold a bonus from an employee than to lower their salary or get rid of them completely. These reforms are likely to trivialise personal responsibility rather than promote it.

When it comes to the financial welfare of the country, even of the EU, it is not the thought that counts. Change policy effectively and sustainably, or do not change it at all. This cap will not ultimately mean that the renumeration of bankers is lessened; it will simply distance them from the consequences of their mistakes. Spearheading a principle without considering its pragmatic implementation achieves nothing.

BY: David Salisbury