Brussels cap on bankers' bonuses is knee-jerk and ill-conceived

The EU move will only serve to jack up salaries and allowances — it will not reduce their overall pay

(Reuters)

As expected, Chancellor George Osborne has lost his argument on bankers’ bonuses at the European Court of Justice.

The Treasury was not defeated on just one of its claims but all six. Game, set and match to the French and Germans who want to end huge pay-outs for bankers.

Banks will only be able to pay a bonus of 100 per cent of salary, although a vote by shareholders takes this to 200 per cent.

Osborne’s main thrust in the UK Government’s appeal against the move was that the cap weakens financial stability by requiring banks to raise salaries — something that cannot then be undone during difficult times. It was a strong and perfectly valid defence.

The banks must now contend with the prospect of paying bigger salaries and smaller bonuses — larger fixed costs in other words. In the past, if business went south, management could always slash the bonuses. That ceases to be an option, and henceforward it will be jobs that go.

Similarly, one aspect of bankers’ pay that so outraged the public — the lack of a mechanism to claw back bonuses in the event of a profits disaster or scandal — is also harder to put into practice.

Someone’s salary is legally more watertight and difficult to attack than a variable bonus. This is all a long way of saying the French and Germans, in their desire to clobber bankers have royally screwed up.

Of course, there may be some deeper conspiracy behind their madness — that this will be a hammer blow to the City of London’s hegemony, and could see bankers deserting and moving to more-favourable climes. In which case, they may achieve their goal.

Bankers’ pay is an emotive subject, and the size of some bonuses has been obscene. It’s also the case that virtually only in financial services are staff paid huge multiples of their salaries.

Elsewhere, employees who receive bonuses are paid fractions of their basic pay; in the City it’s the basic multiplied two, three, four, five times. But the EU move will only serve to jack up salaries and allowances — it will not reduce their overall pay.

One plan, that bankers should be paid with “performance bonds” — bank debt linked to how well the bank performed over the coming years which would have the effect of spreading out their pay over a longer period and could be withheld if there had been abuse — was the most-pragmatic solution. Now that idea has most likely perished, because if part of the salary was retrievable that would make it variable under EU rules.

As it becomes enshrined in law, the EU solution is knee-jerk and not thought through. Banks that hitherto have supported the EU may find themselves looking more fondly at Ukip and Nigel Farage.