Oct 25 2009
Bonuses are too big
The government keeps threatening the financial sector for paying bonuses that are too large. It fails to explain why, and fails to take the action that would curb them.
There are three categories of institution paying over large bonuses.
1. The banks where the state is a significant shareholder.
2. Institutions which would benefit from state loans, guarantees and subsidies if they got into financial trouble.
3. Genuinely private sector competitive companies, which would go bust or require private shareholder subsidy if they over pay.
The fact that over large bonuses are being paid in each of these three categories should worry us. It is evidence that the government’s monetary policy is wrong. Money is too easy for the financial sector, and too tight for most of the rest of the private sector. The government has designed a financial money go round to allow the public sector to spend as much as it likes. Because much of this money passes through the financial system on its way to the government, the government is allowing financial institutions to make apparently super profits and reward itself accordingly. We need to control the amount the government prints and borrows, and to reorient money and banking policy in ways I have often described so it is fairer across the rest of the economy. The regulators are forcing banks to direct their excess money to the government, and preventing them lending it on to other businesses and individuals.
If we rebalanced money policy in this way there would be no need to take other action for category 3 businesses paying bonuses. Their actions are a consequence of money that is too easy for financiers and would stop if money were tighter for them and freer for others. Politicians could still express opinions on the private sector bonus levels, could still argue about tax levels and equality, but there would in my view be no need to take special measures about truly private sector bonuses.
In the case of Category 1 bonuses, the government should act strongly. It should tell all its higher paid employees and Directors in banks with substantial state shareholdings that there are to be no bonuses until the bank concerned is profitable, able to trade without state support and repaying the taxpayer money it has taken. They argue that they need to match other institutions to retain talented staff. If that is the case they should establish those businesses requiring such people as separate businesses and sell them off so we can see they are unsubsidised. Then they can pay what they like. The top people in the state banks should be given incentives to repay the taxpayer money, but not paid bonuses before they have done so.
Category 2 businesses are the most difficult. The principle applied should be to say that they can pay what bonuses they like, but all the top executive bonuses are contingent on not receiving any state aid or specific gurantees. Should the institution need state help, all the unpaid bonuses would be forfeit. If past bonuses were thought to be excessive, the state aid might be conditional on repayments in certain cases.
17 Responses to “Bonuses are too big”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Doesn’t all this depend on having a Government that both understands the situation, and has a fully functional spine?
‘The politics of envy’ are obviously back in fashion. Tax ‘em till the pips squeak that’s what I say.
Why aren’t these commonsense proposals being acted on as we speak?
I suspect that the government is paralysed. Mr Brown has surrounded himself with nice toadies who, despite huge academic credentials, couldn’t run a whelk stall. Worse than that, he has sucked all decision making into No 10 Downing St.
And he has not got a clue on how to get out of the mess he himself has landed the country in.
I was horrified last night when I tuned in to “The Thick of It”. Is this really how bad it has got? When the woman minister was faced with the choice of dropping either her daughter or husband in the poo and then being rewarded with a nice little bill in parliament, I turned off in disgust.
We desperately need an election now. Maybe the back bench rebellion over the Postal Strike will split off some crucial back benchers…….
And, as usual, what you say makes good sense.
Great suggestion Mr Redwood; Sid the Shark here, derivatives trader.
I can see opportunities for some new market products here. I see, for a starter, the possibility for a “BDS” (Bonus Default Swap). Should the barrow boy execs who run my outfit have to go to the government for cash, and I loose my bonus, some counter-party will pay me a large lump of what I was expecting.
The fact that the government owns a large lump of my outfit is your problem not mine. I still have a pile of toxics in the basement and they are coming your way. Slowly slowly catchy monkey style, unless you let me make, and retain, loads of profits to quietly shift the bloody stuff into the local landfill (or the BoE).
If you start getting shitty with me and my bonus, remember the government needs me to keep buying its IOUs at the DMO shop.
I have you by the short and curlies. We can go on a buying strike faster than a postal worker working a five hour day. (The other two and a half hours are his bonus pay; I don’t here you going on about that). All the time you are running a massive budget deficit, you can’t touch me. I will find a work around for any rules you can think up. I am much much cleverer than the government and much bigger.
So my friend, its like this, you need me more than I need you. Me and my mates down here on the trading floor are the guys with the degrees in higher maths. My bosses are the barrow boys of the sixties and seventies. They didn’t have a clue what we were doing and they understood it even less. They were happy when we were making piles of cash and so was the government. If you want me to do it again, and you will, it will be much harder next time. So you better keep me sweet.
Good to see an analytical approach to the overall issue. There is another aspect to this. Where over large bonuses go to people who pay little or no UK tax by offshoring their income and assets, it is one thing. If they were to be paying their full whack as most of have to, whether we like or not, and there was a full and genuine input into the UK economy, then at least some high levels payments might be more justified.
The government has made clear that no bank will be allowed to fail thereby giving carte blanche to bankers to take risks to enrich themselves knowing that the taxpayer will have to suffer any losses. As some say, they have privatised the gains and nationalised the losses. When is someone going to deal with this? What has happened to the “toxic assets” and how do we know that those same bankers that caused so much hardship are not doing exactly the same all over again? I heard that bankers have a sort of acronym for their future behaviour when it all goes wrong again – IBG -I’ll be gone with my bonus!
Let’s not forget the State too.
HMRC was castigated last year for losing a £Billion, and also being incompetent and inefficient, but it paid out £27million to it’s workers in bonuses. Quite apart from the State should not pay any bonus because the pension and remuneration system takes account of that, why?
@Mike Stallard
You are aware that “The Thick Of It” is fiction, right?
It’s politically-astute, clever parody fiction, but fiction nonetheless.
“Turning off in disgust” is an odd response to fiction. By that premise, I guess you’d never watch a murder mystery or a thriller, and horror movies must be terrifying for you!
Category 2 – “institutions which would benefit from state loans, guarantees and subsidies if they got into financial trouble.” But which are these institutions? Please name them. Is Barclays Bank, which deliberately turned down state aid, one of them? Or are we talking about NotWork Rail?
Where I differ from John Redwood is that I would sell off state shareholdings in banks as rapidly as possible – which is a matter (a) of making full disclosure about toxic assets and (b) being willing to sell to the highest bidder(s) regardless of the wishes of the current (failed) management.
Then there would only be category 3 financial institutions.
However, I agree 100% about what you say about monetary policy.
Bank bonuses are a transfer of wealth. From customers, taxpayers, pensions funds and individual shareholders to a financial elite who appear to be smarter than the government.
And as Acorn says they have us by the short and curlies.
What confidence can you give us John, that things would be significantly different under the Tories? Who is smart enough to take on Sid the Shark and get a better deal for us all?
Acorn
Priceless !!!!!!!
Dear Steve,
I thought about this before I wrote.
Answer the following:
Robin Cook’s divorce (quite sudden?)
Tessa Jowell’s estrangement (at a time when her husband was under pressure in Italy).
Clare Short’s love child (announced at the time of a Cabinet row).
The problem, you see, is that it is all true!
Anyway, when things get too embarrassing on TV, I leave the room even if it is fiction!
Are the banks paying contingency fees to the state to cover the implicit guarantees which have been given?
If so I guess it will be yielding a huge premium for the public coffers.
If not it would explain the huge profits and bonus payouts.
Can I have a collateral free guarantee from the state for my business please?
Yeah – right.
I think there is a Cat 4: the Wall St banks that have made a profit as a gift from the state, as identified by Soros in the FT. I think they’re where Sid the Shark is currently employed.
great post acorn
many a true word spoken in jest
Putting aside the scale of bonuses for now, my main concern about bank bonuses generally is whether they are being used effectively enough. Are they being used to reinforce the more appropriate behaviours given the present situation.
From a technology R&D perspective my impression was always that the city had a very, very short term view of things and the decline in UK science, R&D and manufacturing has not changed my perspective one bit.
Shouldn’t the bonuses by tied to paying back the taxpayer loans to the banks as quickly as possible and revitalising the wider economy through longer term investments and credit to commerce and industry?
Bonuses should also be fully taxed at UK standard rates.
Acorn,
Just like the Miners in the 70s?