Anti-bonus witch-hunt has gone too far
NONSENSEon stilts: that is the only way to describe the anti-bonus hysteria gripping governments worldwide. Gordon Brown weighed in to the cacophony again yesterday, though he has fortunately not gone as far as the French, who want to impose quantitative limits on payouts. The prime minister did float the possibility of limiting the share of revenues or profits paid out in bonuses, however, though the rest of his comments merely reiterated existing, relatively anodyne, government policy.
By contrast, Nicolas Sarkozy wants the G20 to form a tax and regulatory cartel to prevent his idiotic policies from triggering a mass exodus. If everybody caps bonuses, the thinking goes, then there will be nowhere for bankers to go, countries would no longer compete for financial institutions and so Paris, London and New York would be able to get away with punishing their high-earners. Of course, that the likes of tax-free Dubai are not part of the G20 scuppers the plan; but that is just one of many fatal flaws in the anti-bonus proposals.
It is true that some reforms are needed. Long-term success needs to be better rewarded; greater checks are required to prevent over-enthusiastic salesmen; and failure needs to be punished through sackings, not rewarded with pay-offs. Proposals to reform pay structures to make compensation policies more efficient and less likely to fuel excessive risk-taking make sense. Bonuses should not all be paid immediately; they should be a mix of cash and shares; there should be claw-back clauses in case of subsequent problems; boards should stop using remuneration consultants to justify ever-higher pay, regardless of results.
But artificially limiting remuneration to a certain share of revenues or profits would be a terrible idea. If payouts were linked exclusively to profits, even high-achievers that continue to make money for their firm could not be rewarded during bad years. This would be deeply counter-productive and cripple institutions. If payouts were fixed at a certain share of revenues, the incentive would be for growth at any cost to boost the allowable bonus pool. Firms would also have an incentive to minimise the number of staff; there would be mass sackings at the first hint of a downturn. One would also expect an explosion in the number of off-balance sheet employees — consultants and freelancers. It would often make sense for teams to break away and to sell their services on a consultancy basis, thus reclassifying wages as a general business expense.
If the limit were only on bonuses, then these would be replaced by much higher wages, together with an annual pay round which allows cuts as well as pay increases. So wages would move up and down every year, mimicking bonuses and thus reflecting past performance. And if only the big firms were regulated, many activities would migrate to hedge funds and start-ups. If all firms were affected, the rules would make even less sense: many, if not most, small businesses pay virtually all their revenues – and in some cases, more than their revenues – to employees as wages.
There is much that is wrong with the global economy; but the current witch-hunt against high earners, few of whom can truly be held responsible for the current crisis, is vindictive, unfair and could throttle the recovery. Let us hope the G20 sees sense. [email protected]