George Osborne's decision to cut the top rate of tax is the gift that keeps on giving - to Labour, in political terms, and to the very, very rich, in financial terms. Understandably then Labour is ramping up its campaigning around the cut ahead of its implementation in a month.
But there is scope to focus in on one particular group of £1m+ a year earners that will benefit - bankers. Because there is also that slow-burn policy issue of disclosure of below-board pay for top-end earners within banks. Sir David Walker - who has changed his mind on what extent of disclosure is sensible at least three times - has just announced that he wants Barclays (which he now chairs, of course) to disclose details of pay across the bank.
Be very wary of expectations management, but the Grauniad piece on this initiative speculates that this could see Barclays reveal that as many as 600 staff earn £1m+. Also in that article it is revealed that in 2011 HSBC had almost 200 staff on £1m+, whilst RBS had over 100. So we could be looking at around 1,000 people working for banks earning over a million a year. Labour estimates that there are 13,000 in total earning that much, so at a push we could be looking at 1 in 10 of them being bankers.
Obviously this needs to be treated with caution (some of those bank staff may not be paying tax in the UK?) but I reckon it is at least worthy of exploration. We could be looking at a secondary story of "Osborne gives £100m back to bankers" (£100K tax cut X 1,000 recipients).
Final thought - going back to Walker's twisting position on bank pay disclosure, he famously penned an article giving the Govt cover to back away from extensive disclosure (and just disclose the earnings of a handful of below-board high earners). If banks stuck to that it would, of course, be difficult to assess the number of bankers on £1m+. Is it too cynical to think that Osborne (who must have been planning the tax cut some way out) and his minions were aware of this, and thus this was part of the calculation in not wanting more extensive disclosure?
Wednesday, 27 February 2013
Kay, Myners & Standard Life
From Lord Myners' evidence to the BIS committee on the Kay Review (and specifically the investor forum idea):
From Responsible Investor today:
Lord Myners: I will be very interested, Chair, to read the transcript from when you interview people who are supposedly establishing this investor forum, and to see how successful they are in convincing you that they are going to set up something that is really meaningful. My suspicion is that you will have significant doubt. I would then suggest to you that, if they cannot do it alone in this country, it is going to be almost impossible to do it globally.
From Responsible Investor today:
Standard Life Investments has said it is “debatable” whether the proposed investor forum – one of the key ideas of the recent UK government-backed Kay Review – will achieve results.And they are far from the only asset manager saying this
....
Now Standard Life, one of the leading fund managers in the UK with £163.4bn (euro) under management, has poured further cold water on Kay’s idea, saying: “While there will always be room for improvement, it is debatable whether this particular proposal will achieve the desired results.”
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....
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....
SHARE Key Proxy Votes Survey
Canadian labour-friendly shareholder activist group SHARE has gone live with its latest annual voting survey. What's more they have made it a rather wonderful online resource, which you can play about with here.
It's really rather good!
Here's the press note on it.
It's really rather good!
Here's the press note on it.
Most shareholders continue voting with management on key issues including the Northern Gateway Project and SNC-Lavalin CEO’s generous severance package
VANCOUVER, BC – While the majority of shareholders continue to vote with management, a growing number of shareholders are giving more care and attention to how they vote, with several key votes in 2012 registering 20% or more of shareholders voting against management recommendations.
One highlighted issue is a shareholder proposal at Enbridge Inc. asking the company to report on the risks associated with First Nations’ opposition to the Northern Gateway pipeline. Nearly 30% of shareholders voted for the proposal, noting that First Nations’ consent plays a pivotal role in the future of the Enbridge proposal.
“The response on the Enbridge shareholder proposal illustrates that shareholders increasingly recognize the investment risks associated with social and environmental issues when they vote,” said Peter Chapman, Executive Director of the Shareholder Association for Research and Education (SHARE). “However many institutional investors, including charitable foundations and trusts, are not yet providing guidance to managers and proxy voting service firms to ensure that voting is aligned with their interests.”
The 2012 annual Key Proxy Vote Survey analyzed the voting records of 32 firms with combined Canadian equity holdings in excess of $58 billion in 2012. SHARE has been producing the survey since 2001 with the goal of making proxy voting more accessible and encouraging fiduciaries to more rigorously review the work of those that vote proxies on their behalf.
The vote result at SNC-Lavalin also illustrates the increasing willingness of shareholders to vote against management. At SNC-Lavalin’s shareholder meeting in May 2012, nearly one-quarter of votes were lodged against the executive compensation package offered to former CEO Pierre Duhaime, which included $1.9 million in salary continuance plus other benefits. This generous severance package was offered despite the on-going criminal investigation into corruption and bribery charges both in Canada and Libya during Mr. Duhaime’s tenure.
“In the realm of proxy voting, a vote of 25% against a severance package is a strong show of shareholder opposition” notes Laura O’Neill, SHARE’s Director of Law and Policy, “But one still wonders how more than 75% of shareholders voted in favour of the former CEO being rewarded so generously despite the significant loss in shareholder value on his watch.”
New this year, individuals and institutions can review select proxy voting decisions of participating fund managers and proxy service firms online and find out exactly how they voted on key issues. “It is important to have a resource that makes proxy voting practises easily accessible to pension fund trustees and other fiduciaries,” said Charley Beresford, Executive Director of the Columbia Institute, one of the report’s sponsors. “The proxy survey website allows shareholders to review how their proxy firm voted on environmental, social or governance issues with the click of a mouse.”
Thursday, 21 February 2013
Six years of blogging
I belatedly realised the other day that I've just passed my sixth birthday blogging. So I thought I would bung up a few short thoughts on how things stand six years on....
1. My view of the world has shifted a bit. I no longer accept many of the cornerstones of mainstream corporate governance, such as the general emphasis on disclosure as a policy tool, in addition to more specific ideas such as the use of performance-related pay to guide behaviour. In broader economic terms I am ever more convinced that the declining share of wealth going to labour is at the heart of much of what has gone wrong, and that rebuilding the ability of working people to claim their fair share is a massive part of the solution.
2. Linked to that, my own focus has drifted, I've blogged less about what unions are doing, though probably more about what Labour is doing. This is probably due to my day-to-day work, where I do more policy-related work and deal less than I used to with union-specific issues. However, given my over-arching political & economic view of the world, this is something I think I need to rebalance again. There are a lot of people giving advice to Labour, not so many to labour, so I'm going to try and up the union-related content again.
3. The topics that dominate the headlines even in the microcosm I inhabit have changed. I was blogging a lot five years ago about private equity, and there was a lot of TU commentary about it. That has all gone rather quiet, at least in the UK. Instead we've seen a much greater focus on reforming the financial sector, as opposed to battling bits of it.
4. I can't write as well as I used to, which is largely because I don't have the same time to commit to the blog. This is massively outweighed by the reason I can't spend as much time on blogging these days, who has just turned four! In retrospect I am very glad I didn't stop blogging a couple of years back & I'm grateful to people for encouraging me to stick with it.
5. On the crisis, the big point I draw from it is that a big dividing line in politics, including within the Left, is how significant it is. I tend to the view that, while it's still too early to tell where we are heading, it is very clear that it has hollowed out a lot of the intellectual architecture around markets/ownership/governance etc that existed in 2007. Some things are still left standing that I think are basically facades, and could fall if subjected to a proper push. In addition, because of the confusion over what actually works, I think ideas that have until recently seemed untouchable or unthinkable are back in play.
On the same point, I think that there is corresponding legitimacy crisis for some parts of society. Banks are the most obvious example, but there are others. I have worked in a policy environment where certain organisations' views have been given a greater weight than others because of who they notionally represent, and thus how important they are within a given sector. But in the same way they have until recently been given greater weight, they could be given lesser weight in future. For example, there is no reason why policymakers should necessarily give the views of investor trade bodies more weight than those of trade unions when thinking about governance issues.
6. Finally a couple of (hopeful) predictions for the years ahead. I hope we are beginning to see a rethinking of the value of performance-related pay. I have been expecting this for a few years now, and we're starting to see a few signs that disillusionment is setting in. I don't underestimate how much of a shift this will be, since it's been an article of faith in mainstream corp gov for two decades that you need to use pay to control executive behaviour. But if a more behaviourally-informed approach to corp gov develops I don't see how we can ignore the evidence that performance-related pay isn't suited to either complex tasks, or long-term ones.
Secondly, I think we are seeing the first signs that a concerted push on the Left for a greater employee role in governance is on the cards. I put my hands up and admit this is not something I immediately expected as the crisis hit, but that goes to show you how existing 'common sense' in corp gov as been discredited and, as such, others have been given space to develop. As I've blogged recently, there's a lot of talk now on the 'thinky' bit of the Left. If we want to see this develop we need to start getting a practical programme together.
1. My view of the world has shifted a bit. I no longer accept many of the cornerstones of mainstream corporate governance, such as the general emphasis on disclosure as a policy tool, in addition to more specific ideas such as the use of performance-related pay to guide behaviour. In broader economic terms I am ever more convinced that the declining share of wealth going to labour is at the heart of much of what has gone wrong, and that rebuilding the ability of working people to claim their fair share is a massive part of the solution.
2. Linked to that, my own focus has drifted, I've blogged less about what unions are doing, though probably more about what Labour is doing. This is probably due to my day-to-day work, where I do more policy-related work and deal less than I used to with union-specific issues. However, given my over-arching political & economic view of the world, this is something I think I need to rebalance again. There are a lot of people giving advice to Labour, not so many to labour, so I'm going to try and up the union-related content again.
3. The topics that dominate the headlines even in the microcosm I inhabit have changed. I was blogging a lot five years ago about private equity, and there was a lot of TU commentary about it. That has all gone rather quiet, at least in the UK. Instead we've seen a much greater focus on reforming the financial sector, as opposed to battling bits of it.
4. I can't write as well as I used to, which is largely because I don't have the same time to commit to the blog. This is massively outweighed by the reason I can't spend as much time on blogging these days, who has just turned four! In retrospect I am very glad I didn't stop blogging a couple of years back & I'm grateful to people for encouraging me to stick with it.
5. On the crisis, the big point I draw from it is that a big dividing line in politics, including within the Left, is how significant it is. I tend to the view that, while it's still too early to tell where we are heading, it is very clear that it has hollowed out a lot of the intellectual architecture around markets/ownership/governance etc that existed in 2007. Some things are still left standing that I think are basically facades, and could fall if subjected to a proper push. In addition, because of the confusion over what actually works, I think ideas that have until recently seemed untouchable or unthinkable are back in play.
On the same point, I think that there is corresponding legitimacy crisis for some parts of society. Banks are the most obvious example, but there are others. I have worked in a policy environment where certain organisations' views have been given a greater weight than others because of who they notionally represent, and thus how important they are within a given sector. But in the same way they have until recently been given greater weight, they could be given lesser weight in future. For example, there is no reason why policymakers should necessarily give the views of investor trade bodies more weight than those of trade unions when thinking about governance issues.
6. Finally a couple of (hopeful) predictions for the years ahead. I hope we are beginning to see a rethinking of the value of performance-related pay. I have been expecting this for a few years now, and we're starting to see a few signs that disillusionment is setting in. I don't underestimate how much of a shift this will be, since it's been an article of faith in mainstream corp gov for two decades that you need to use pay to control executive behaviour. But if a more behaviourally-informed approach to corp gov develops I don't see how we can ignore the evidence that performance-related pay isn't suited to either complex tasks, or long-term ones.
Secondly, I think we are seeing the first signs that a concerted push on the Left for a greater employee role in governance is on the cards. I put my hands up and admit this is not something I immediately expected as the crisis hit, but that goes to show you how existing 'common sense' in corp gov as been discredited and, as such, others have been given space to develop. As I've blogged recently, there's a lot of talk now on the 'thinky' bit of the Left. If we want to see this develop we need to start getting a practical programme together.
Wednesday, 20 February 2013
Myners vs the Kay Review
The BIS select committee is currently holding an inquiry into the Kay Review. Last week saw Lord Myners give evidence to the committee, and the transcript has just been published. It is really worth a read. I suspect many people's impression of Kay is "good analysis, weak recommendations". In addition, there is a fear that the usual vested interests will smother the Review's already modest ambitions.
If that's where you sit, you'll find a lot to reinvigorate you in this transcript. I think he hits all the right targets. Labour folks reading this should also bear in mind that he's been a fund manager, he's been on the boards of major companies (like chairing M&S), and served as a Treasury minister. Very few people (especially Labour people) have tried to crack the issues around ownership at a senior level from all those perspectives. So when, for example, he talks about the way that reviews like Kay get stifled,he's talking from experience. (In fact I suspect one reason that BIS set up Kay, despite having already done a civil servants-driven consultation into the same issues, was because Myners criticised the idea of a review into such important issues not being independent of govt.)
There's a lot of info in here. The opening statement alone covers a lot of ground, but the core point is that Myners doesn't expect the Kay Review to have a significant impact. In fact, he expects it to have barely any impact at all.
Some interesting further points - he is very critical of Kay for failing to come out with any recommendation on M&A (where I think Kay essentially says govt should keep a watching brief), and instead argues for the Business Secretary to have a more interventionist role (including a public interest test). As he points out the weakness of the Review on M&A seems to be quite out of step with the rhetoric used by Vince Cable way back at the September 2010 Lib Dem conference. If Cable thinks there's a problem with M&A he will now have to over-ride Kay (which is what Myners argues is exactly what he should do).
He also backs a financial transactions tax - which was a genuine surprise to me - and from a policy perspective rather than a revenue raising one. As you might expect, a theme running through the evidence is the erosion of any notion of ownership, exacerbated since the rise of HFT but also a long-running consequence of the nature of the asset management industry. You can sense Myners' frustration that another chance to grapple with these issues has been missed, especially as Kay clearly does understand what a lot of the problems with the asset management industry are.
And the stuff on the way that lobby groups will stifle reform (especially if they get their hands on the 'investor forum') is.... well... exactly what I think too!
A point that Myners makes several times is that Cable could still get a grip of this. Again, I struggle to disagree. The longer I have worked in this area the more convinced I have become that only strong political intervention can sort some of these issues out. There will always be people telling you "now is not the best time" or that "working with the industry" is the best way to go. We have seen the weak results of such an approach.
I think it's probably almost too late for Cable. He has fluffed this process twice as far as I am concerned - once by doing the first mini-review, which wasted a year, then by not ensuring that Kay went as far as he wanted. That means the next big round of reform will (fingers crossed) be under the next Labour government in 2015. I hope we make sure we get Myners involved when we do it.
Anyway, I would recommend Labour and TU people who share my interest in these things read the whole transcript. There aren't many people on our side of the fence who can deliver this kind of thing. Below are a couple of the funnier excerpts.
On the Good Practice Statements:
If that's where you sit, you'll find a lot to reinvigorate you in this transcript. I think he hits all the right targets. Labour folks reading this should also bear in mind that he's been a fund manager, he's been on the boards of major companies (like chairing M&S), and served as a Treasury minister. Very few people (especially Labour people) have tried to crack the issues around ownership at a senior level from all those perspectives. So when, for example, he talks about the way that reviews like Kay get stifled,he's talking from experience. (In fact I suspect one reason that BIS set up Kay, despite having already done a civil servants-driven consultation into the same issues, was because Myners criticised the idea of a review into such important issues not being independent of govt.)
There's a lot of info in here. The opening statement alone covers a lot of ground, but the core point is that Myners doesn't expect the Kay Review to have a significant impact. In fact, he expects it to have barely any impact at all.
Some interesting further points - he is very critical of Kay for failing to come out with any recommendation on M&A (where I think Kay essentially says govt should keep a watching brief), and instead argues for the Business Secretary to have a more interventionist role (including a public interest test). As he points out the weakness of the Review on M&A seems to be quite out of step with the rhetoric used by Vince Cable way back at the September 2010 Lib Dem conference. If Cable thinks there's a problem with M&A he will now have to over-ride Kay (which is what Myners argues is exactly what he should do).
He also backs a financial transactions tax - which was a genuine surprise to me - and from a policy perspective rather than a revenue raising one. As you might expect, a theme running through the evidence is the erosion of any notion of ownership, exacerbated since the rise of HFT but also a long-running consequence of the nature of the asset management industry. You can sense Myners' frustration that another chance to grapple with these issues has been missed, especially as Kay clearly does understand what a lot of the problems with the asset management industry are.
And the stuff on the way that lobby groups will stifle reform (especially if they get their hands on the 'investor forum') is.... well... exactly what I think too!
A point that Myners makes several times is that Cable could still get a grip of this. Again, I struggle to disagree. The longer I have worked in this area the more convinced I have become that only strong political intervention can sort some of these issues out. There will always be people telling you "now is not the best time" or that "working with the industry" is the best way to go. We have seen the weak results of such an approach.
I think it's probably almost too late for Cable. He has fluffed this process twice as far as I am concerned - once by doing the first mini-review, which wasted a year, then by not ensuring that Kay went as far as he wanted. That means the next big round of reform will (fingers crossed) be under the next Labour government in 2015. I hope we make sure we get Myners involved when we do it.
Anyway, I would recommend Labour and TU people who share my interest in these things read the whole transcript. There aren't many people on our side of the fence who can deliver this kind of thing. Below are a couple of the funnier excerpts.
On the Good Practice Statements:
Q98 Ann McKechin: It is constant effort. Professor Kay has published a new set of principles, called "Good Practice Statements". The Government has, again, taken a rather hands-off approach, saying that they should prompt market participants to consider their current progress and inform industry-led standards of good practice. How long would you recommend that we wait to see if that approach works, or would you say that we should have moved a lot quicker?Lord Myners: I think we could probably wait until this afternoon.
And on the idea of 'solving' the remuneration problem by requiring execs to hold shares for a much longer period:
Lord Myners: It is rather romantic. You can say that you cannot realise these shares until your retirement, but the fact is that most of us are not in wealth-accumulation mode when we get to retirement; we are in wealth distribution mode. It would be odd to live on a modest income until the age of 60, and then suddenly have wealth beyond the dreams of avarice dumped on you as the reward for 40 years of loyal service. I somehow do not think that would work.
Tuesday, 19 February 2013
I love the bonus cap debate
There's a lot of comment in the press today about continuing attempts in the EU to put a cap on variable pay for bankers. Judging by some of the views expressed, this proposal is clearly driving some people nuts. Great.
Before I get into that consider what the core proposal is - that bankers can earn only 100% of salary in variable reward. This is considerably more than almost the entire working population can expect, most of whom are offered no bonus, and that level of variable pay would not have been ungenerous even for company director until relatively recently. So, essentially, opponents of a cap are arguing that the current fixed/variable split is the correct one (and implicitly they suggest that current pay is at a 'natural' level to which it will return whatever reform is enacted). I would add in passing that there is no evidence provided, as far as I am aware, as to why a ratio greater than 1:1 is required in terms of motivation.
As I've written before, there's a really dishonest argument about a bonus cap which is that it would 'drive up' base pay. Except it wouldn't, the banks would 'drive up' base pay - if they chose to - no-one is forcing them to. If the banks do decide to increase base salaries to compensate people, who are extremely highly paid, for a loss in variable pay let them justify that to their shareholders and other stakeholders - it will be their responsibility. Anyone who argues that a cap will "cause" base salaries to rise or "drive" them up is, unwittingly or otherwise, obscuring the fact that banks decide whether this will happen or not.
Pushing this on a bit, one of the reasons I really don't like large variable pay is that it obscures increases in overall reward that might be challenged if expressed in comparable increases in base pay. In reality most incentive schemes pay out something most of the time, which is why bankers come to expect their bonuses. So variable pay isn't actually that variable. But because it's notionally 'at risk' shareholders and others are willing to tolerate a lot more than they would with base pay.
Therefore, a greater emphasis on base pay would make increases in overall reward a lot more obvious, and therefore open to greater challenge. I do wonder if that is one of the reasons that banks and their hired liars hate this idea so much. After all, unless you consider that they love risk so much that they would rather have a greater proportion of their pay at risk, why would bankers complain about having a more reliable income?
Another argument put forward by the industry's shills is that restructuring remuneration in this way would make them less 'flexible'. Well, maybe. Of course banks would still have the ability to cut staff costs by a maximum of 50% through pay structure alone. But they could also learn from experience elsewhere in the private sector, or indeed the public sector. In addition to paying zero bonuses they could freeze base pay entirely, or even cut it. If the cost pressures they face are still too great they could even cut staffing levels. This is what lots of other employers have to do. And, again, if banks didn't seek to push up salaries in response to the cap they could face lower overall wage costs - it's their choice.
A final argument I find really odd has come from the CBI which says that a cap would "take the power to hold companies to account out of investors’ hands, by removing tools such as voting on pay policy and implementation" This is simply nonsense as far as I can see. No-one is suggesting that shareholders would lose their existing powers on pay where they exist, as in the UK. If the point is that pay policy will be affected by this policy before shareholders get a say on it then that's true, but nothing new. After all, the FSA remuneration code already does this.
I think the CBI's real concern is buried elsewhere in their comments today: "We are concerned that this could be the thin end of the wedge, with Europe trying to expand this legislation to apply to businesses more generally, which could damage stability and growth."
Yep, and the rest. If you only need a 1:1 ratio for bankers, why do we need a higher ratio in other companies? This pulls you back to the questions like why we ever let (not so) variable pay become such a big chunk of the total, and what evidence there is for it being necessary. These are questions that I doubt the CBI wants opened up again, it would rather everyone kept the focus on 'performance linkage' rather than scale of pay.
So overall I think the bonus cap proposal is actually very helpful. The nonsense it provokes from opponents shows that the current structure of pay in the banking industry and elsewhere is far more open to challenge than we might imagine. The fact that the most powerful and well-financed lobbyists think this is worth expending reputational capital on (why is the CBI sticking up for bankers' bonuses???) may tell us quite a lot.
Before I get into that consider what the core proposal is - that bankers can earn only 100% of salary in variable reward. This is considerably more than almost the entire working population can expect, most of whom are offered no bonus, and that level of variable pay would not have been ungenerous even for company director until relatively recently. So, essentially, opponents of a cap are arguing that the current fixed/variable split is the correct one (and implicitly they suggest that current pay is at a 'natural' level to which it will return whatever reform is enacted). I would add in passing that there is no evidence provided, as far as I am aware, as to why a ratio greater than 1:1 is required in terms of motivation.
As I've written before, there's a really dishonest argument about a bonus cap which is that it would 'drive up' base pay. Except it wouldn't, the banks would 'drive up' base pay - if they chose to - no-one is forcing them to. If the banks do decide to increase base salaries to compensate people, who are extremely highly paid, for a loss in variable pay let them justify that to their shareholders and other stakeholders - it will be their responsibility. Anyone who argues that a cap will "cause" base salaries to rise or "drive" them up is, unwittingly or otherwise, obscuring the fact that banks decide whether this will happen or not.
Pushing this on a bit, one of the reasons I really don't like large variable pay is that it obscures increases in overall reward that might be challenged if expressed in comparable increases in base pay. In reality most incentive schemes pay out something most of the time, which is why bankers come to expect their bonuses. So variable pay isn't actually that variable. But because it's notionally 'at risk' shareholders and others are willing to tolerate a lot more than they would with base pay.
Therefore, a greater emphasis on base pay would make increases in overall reward a lot more obvious, and therefore open to greater challenge. I do wonder if that is one of the reasons that banks and their hired liars hate this idea so much. After all, unless you consider that they love risk so much that they would rather have a greater proportion of their pay at risk, why would bankers complain about having a more reliable income?
Another argument put forward by the industry's shills is that restructuring remuneration in this way would make them less 'flexible'. Well, maybe. Of course banks would still have the ability to cut staff costs by a maximum of 50% through pay structure alone. But they could also learn from experience elsewhere in the private sector, or indeed the public sector. In addition to paying zero bonuses they could freeze base pay entirely, or even cut it. If the cost pressures they face are still too great they could even cut staffing levels. This is what lots of other employers have to do. And, again, if banks didn't seek to push up salaries in response to the cap they could face lower overall wage costs - it's their choice.
A final argument I find really odd has come from the CBI which says that a cap would "take the power to hold companies to account out of investors’ hands, by removing tools such as voting on pay policy and implementation" This is simply nonsense as far as I can see. No-one is suggesting that shareholders would lose their existing powers on pay where they exist, as in the UK. If the point is that pay policy will be affected by this policy before shareholders get a say on it then that's true, but nothing new. After all, the FSA remuneration code already does this.
I think the CBI's real concern is buried elsewhere in their comments today: "We are concerned that this could be the thin end of the wedge, with Europe trying to expand this legislation to apply to businesses more generally, which could damage stability and growth."
Yep, and the rest. If you only need a 1:1 ratio for bankers, why do we need a higher ratio in other companies? This pulls you back to the questions like why we ever let (not so) variable pay become such a big chunk of the total, and what evidence there is for it being necessary. These are questions that I doubt the CBI wants opened up again, it would rather everyone kept the focus on 'performance linkage' rather than scale of pay.
So overall I think the bonus cap proposal is actually very helpful. The nonsense it provokes from opponents shows that the current structure of pay in the banking industry and elsewhere is far more open to challenge than we might imagine. The fact that the most powerful and well-financed lobbyists think this is worth expending reputational capital on (why is the CBI sticking up for bankers' bonuses???) may tell us quite a lot.
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