Tuesday, 26 February 2013

First they came for the bankers' bonuses...

As I've blogged before, there's something interesting going on around the UK's fight against a max 1:1 ratio for fixed to variable pay for bankers. Norman Lamont's staggeringly bad piece in the Telegraph today reaffirms my belief that something reasonably significant in this argument.

The interesting thing about most of the UK commentary on this topic is how bellicose it is. Lamont's piece has a few touches of this in it - the proposal is "lunacy" for example. Certainly the general tone of the arguments that UK lobbyists make is stupid European politicians don't know what they are doing, and whilst the punters might like this kind of 'populist' attack on the bankers they don't realise that it's against their own interests. In other words "Leave it, thickos!"

I have no doubt that, as Lamont argues, there is an element of European-level politicking going in here. No doubt some French and German politicos would like to get one over on the City, and thus hobble the UK a bit. But equally I think it is more than likely that something else is going on with the UK's lobbying. The limited ambition of the bonus cap proposal doesn't seem to deserve the enormous amount of crap that is being thrown at it. So why is the CBI willing to shred its own reputation defending bankers' bonuses over 100% of salary? (I don't buy that anyone really believes this level of detail of bankers pay can affect the economy).

Certainly the formal arguments don't really add up. Even under a 1:1 ratio bankers can expect far more variable pay than almost anyone else. That means that banks still have some flexibility to manage their costs through remuneration policy alone. If that isn't enough they could enact a pay freeze, or pay cut. And if they get really desperate they can always cut the (highly-paid) headcount. This is after all the kind of tough decision that lots of businesses are having to make. It's not clear to me why, uniquely, banks need to pay their staff an enormous amount of variable pay just to enable them to get through a tough period.

Obviously, banks will claim in response that more variability = more flexibility. But then that doesn't seem to square with the argument that any downwards pressure (or pressure at all, really) on bankers' pay will see them all leave the country. Presumably it's at least relatively easier for a banker to change firm, rather than country. If a bank massively cuts variable pay in a bad year won't their 'talent' leave for another firm?

In addition, as we know well from PLC experience, variable pay isn't actually that variable, most incentive schemes pay put something most of time. I am sure bankers come to expect their bonuses and as such big cuts will indeed be seen quite negatively. They don't really want 'flexibility' in remuneration policy, they want as much of that 100% (or 200% or 300%) in their pocket as possible, and the must banks know this too. (It's striking too that the PwC research on the psychology of incentives found that most execs don't really like variable pay that much.)

So what is going on? I think in part it is about the politics of the UK in Europe. We don't want to get beaten on a issue that affects an area of competitive advantage. Hence this is, in part, a proxy for a wider pushback against European 'meddling'.

But I am a bit more convinced that there maybe some concern about the direction of travel on remuneration policy in general. If 1:1 is enough for bankers, why do we need a higher ratio for company directors. Maybe the CBI have been reading their Pastor Niemoller:

First they came for the bankers' variable pay, and I did not speak out because I was not a banker.... 

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