Dec 07 2009
How could you tax bankers’ bonuses?
We learn this morning that the Chancellor is thinking of a windfall tax on bankers’ bonuses.
Drafting such tax legislation will be tricky. Defining a banker and a bonus will prove difficult. Doing so without making the Bill hybrid will also be complex. It is a principle of legislation that it has to apply fairly to all people in the same position or category. If it does not it is hybrid and special procedures then need to be followed.
To me the issue we need to sort out is the payment of large bonuses to highly paid individuals working for a state subsidised bank. Taxpayers do not take kindly to seeing large sums of their money paid out to highly paid bankers in institutions they are having to prop up. The remedy is easy. You don’t pay them, unless and until the subsidy and the state capital is returned to taxpayers. You don’t need legislation for that.
The state should not be owning an investment bank anyway, so if these highly paid people want to leave if you block their bonus then make their day by sellling the investment banking arm, so they can then be paid what the new shareholders think correct. If the Board don’t like it, let them resign and hire a Board which is smaller and cheaper, as part of the necessary cost reduction programme within these loss making banks.
The governent is likely to want to tax all banker bonuses in all UK based banks. They think it wrong to single out state owned banks for worse treatment, preferring to single out all UK based banks at risk of sending some people and even banks abroad. They need definitions which will work. I guess you decide that a banker was anyone working for an institution with a banking licence, though you would capture a wide range of differing skills within such institutions. You could cut out many of the “less guilty” people by having a high threshold for the bonus you wished to tax – say no bonus under £100,000 attracted the special charge. Defining the bonus could be generous to the bankers by just capturing the cash bonus, or it could have more bite if you defined a bonus as any pay above the stated basic salary in whatever form it was paid.
43 Responses to “How could you tax bankers’ bonuses?”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
This legislation has the potential to be another “Dangerous Dogs” act – an emergency bill that doesn’t solve the perceived problems it is intended to address, but adversely affecting the innocent.
It’s something that isn’t needed. RBS and Lloyds can be influenced by the shareholding; Barclays and HSBC should not be attacked by this vexatious rash of jealousy.
Dividends should not have been paid to those making the decisions that caused banking failure – those who authorised bad loans, over-leveraged, or relied too heavily on the short-term money markets. Indeed, the worst of these could arguably be prosecuted for treason.
Those advisors within the bank who have worked hard on behalf of their clients, maximising client income or offering invaluable advice, deserve any contracted bonus. Having said that, I would expect any reasonable contract to have quite a high threshold before a bonus kicks in, and the potential for a penalty should there be losses. Bonuses should never be a guaranteed one-way bet for the employee. Unreasonable contracts (such as these) can already be challenged in law.
Perhaps those who have taken so much money in bonuses over the last few years would care to offer a management buy-out of the investment arms on RBS/Lloyds/HBOS. They can afford a multi-billion pound bid between them!
This entire affair has turned out to be nonsense.
It suits Gordon Brown to blame the banks for what were effectively his own misdemeanours, and by that I mean expanding the money supply in the way he did.
That hare was successfully set loose with politicians of all persuasions willing to follow it. After all the politics of envy is a sure winner, isn’t it?
As a result we rescued some banks with taxpayer money with the promise that it would be quickly repaid with interest.
Politicians are now determined to interfere in a business about which they know nothing to assuage the public’s perceived anger over the bonuses paid for performance. Worse still they propose to interfere in the businesses of all UK banks by imposing penal rates on all bank bonuses.
Our politicians are suffering a dilemma: are the banks to generate profits in order to repay the bail-outs or do they tax incentive bonuses to the point where they destroy incentive. Or perhaps they think the two are unconnected.
By all means split the banks up and sell off whatever are considered to be peripheral parts but then use the proceeds to pay down the debt owed to the taxpayers.
This business of taxing bonuses and of exacting windfall taxes from banks is no more than a nonsense contrived by politicians to appeal to the electorate, and the Tories, of all the parties, should know better.
I used to work for a FTSE 100 company which operated a bonus scheme. Remuneration for executive directors and those close to the board was divided into (a) basic salary (b) cash bonus and (c) share options. The Board determined the amount of the pot for the cash bonuses and the trigger point for the share options and the amount of shares available for option. The Remuneration Committee of the Board set the salaries and other remuneration of the Executive Directors and their immediate reports.
In the 1980s executives at the top of American companies had discovered that they could pay themselves huge sums of money from shareholder funds by adopting a spurious system of rewards based on ‘performance’. This system migrated to the UK at the end of the decade and many FTSE directors and senior executives quickly attained millionaire and multi-millionaire status. I can explain the many the dodges that can be used to rig the system but I want to keep the post short. However, it is essential to pretend that the middle management is part of the game by giving them modest payments. The less the workforce knows about what is going on the better. The banks road-tested the system to its absolute limits and became market leaders. Why not? The economic boom and the rise in house prices was going to go on for ever and nobody objected whilst the share price and the dividends were roaring up in the right direction.
All top executives have a contract of employment. Their basic remuneration will be contractual, but the bonuses and share options are likely to be at the company’s discretion.
As you say, the remedy lies with the shareholders. This means that the Government can, if it wishes, instruct the Board on what to do about bonuses and share options. The Board has the option of resigning, but otherwise can, if it wishes, exercise its discretion and refuse to pay non-contractual remuneration.
However, because the bonuses in banking are so large anyone deprived of them will start looking for a move to another bank (in the UK and abroad) where a bonus will still be available. Many bankers still have a massive sense of their own entitlement.
Despite the millions expended in bonuses and share options the company I worked for was effectively bankrupt when I left. The top management had ranged from poor to indifferent. However, the Board’s Remuneration Committee was extremely keen to reward ’second raters’ very generously. They had a vested interest – the system only functions properly if everybody joins in the game.
The Government should make a start by instructing the Boards of the banks that it owns to cancel discretionary bonus payments and share option entitlements for 2010. If it embarks on the taxation route the legislation must be properly thought through and a democratic debate held on the subject, including a debate on the unintended consequences.
Meanwhile the real problem of how to restructure the banks in the interest of taxpayers remains in the long grass.
I don’t think bankers, who destroyed their businesses, which would have gone into administration without taxpayers’ money, should receive bonuses. However, I sense the political conjurers at work and that this is being blown up to distract us from the real issue – the parlous state of the economy.
This proposed idea is another piece of all too complicated legislation, coming from a Government who do not appear to understand the basics of human nature.
Another raft of tax legislation will simply lead to further more complicated solutions by smart tax accountants.
Its just like the pay feeze days of the last Labour Government.
Any employer who wanted to give their staff a pay rise, simply changed the job title of the person involved, said it was promotion, and paid the money.
The simple solution is as you say, no bonuses (above a certain amount) until the Company has repaid the taxpayer. This then only applies to Lloyds TSB and RBS.
As for taxing the UK parts of overseas Banks, I cannot think of a better way of getting them to move out of the UK.
I see from the weekend press that RBS is taking a minor equity stake in a very large Care Home Organisation, due to its very generous lending criteria of the past (debt equity swap). So we as Taxpayers are now also minority shareholders in the Care Homes Business via RBS as well.
The fact that taxing bonuses and choosing which ones to tax is such a nightmare is one of the reasons why Labour have been talking about doing this for ages without ever putting anything in place.
Same with tax havens, really – all the rhetoric in the world yet no implementation whatsoever because it would never work.
Labour are out to use any method they can to disguise their own failings. This whole economic mess is of Brown’s making since 1997.
Barclays and HSBC may pay their own staff remuneration they judge to be appropriate and necessary on the basis of their own commercial view and nothing else.
As for British Leyland sorry Lloyds and HBOS (Deja Vu anyone?) it would perhaps have been wise to confront this issue before saddling my son with a generation of debt for him to pay off.
So Gordon Brown wants to tax the bonuses at prudent banks like HSBC?
What kind of message does that send to the banking industry !?!
The only argument I have heard in favour of this tax on HSBC is that HSBC benefited from the banks being bailed out.
But surely the justification for using tax payers money on RBS was that everybody in the country would benefit from RBS being bailed out – so it follows that everybody in the country should be taxed too.
Simply put this tax is a punishment – and as a principle the punishment should be made to fit the crime.
I would argue that the FSA employees be taxed for not regulating loose lending principles?
I always believed that a ‘bonus’ was paid for sterling work above and beyond what is required by your job or as a collective reward for the company doing particularly well.
Considering the state the banks are in, what are these bonuses being paid for? Other than ransom money to keep particular employees.
Cynicism aside if these people earn their keep then possible we should just swallow the bitter medicine and let them get on with it.
I would much rather that bonuses were related to the amount of money that was being paid back to the public purse. Real money that is not Gorgons funny money with wet ink that he waves at SME businessmen who are denied money by the banks they own.
Maybe we should start to pay and be paid in Yuan. It seems more trustworthy these days.
I’ve got a billion Zimbabwe dollars I bought for a joke. It might actually be worth revisiting their value now.
I have been thinking about this since I first heard about the desire to pay bonuses and the board of director’s threat to resign if the bonuses are not paid on the basis that would be against the best interests of the shareholders.
It is typical of government to consider fixing the problem (ie taxing the bonus after they are paid) rather than finding a solution, which in this case is finding a method whereby paying the bonus is actually against the shareholders interests. How could this be achieved?
In my view this could be achieved very easily, assuming the government worded its support contract properly. By that I am assuming the government have included a clause that allows them to call back part or all of the support capital, in the same way that any bank would structure a loan facility to the private sector.
If this is the case the government should then make a call equal to £5 repayment of loan for every £1 paid out of the bonus pool. Therefore if a bank wished to pay out £3bn in bonus they must repay £15bn to the government as well. This repayment would jeopardise the future of the bank and therefore the payment of the bonus is not in the best interest of the shareholders
This whole banking situation is becoming farcical, the government lurching from one crisis to another ever since the ill fated decision to ’save the worlds banking system’ – I’m sure that in a generations time my children will still be as thankful to Mr Brown for this generous piece of philanthropy as I currenlty am.
If someone is smart enough to make their bank tens of millions of pounds (although in the last 6 months simply using a random number generator would have done) then you can rest assured they won’t be paying British tax on their bonuses. We are still a world leader in at least one part of the banking industry – offshore accounts, despite the weak promises of the last G20.
So many potential pitfalls. One example off the top of my head. What about limited companies who do contract work for banks (thinking here of small one or two people company’s, contractors basically), take a small salary (£20k) and the rest as a dividend. Will the dividend count as a bonus? If not, what’s to stop all the banks traders/high bonus earners adopting this position? If dividends will count as a bonus then they will be taxing competent contractors out of the banking sector and into others.
Like so much else from Labour, a nice soundbite and headline but of no practical substance.
so they are going to pull the plug on the NHS IT shambles after how many billion and how many years?
it was obvious to many of us from the beginning it was never going to work, top down dictats imposed by IT always was a disaster in the making
so my question is WHO exactly is carrying the can for this spectacular Labour failure?
Javelin Reply:
December 7th, 2009 at 6:21 pm
I was told by a consultant who worked on the GP software the following …
Labour bought a small software suite from (words left out) that couldn’t be scaled up. So what they did was to run the software on racks of blade servers running PC emulators. The blade servers got so hot that the air conditioning started to fail and somebody was dispatched to the roof with a hose pipe to cool it down. The data center then stopped any new servers being installed and the delivery fell apart.
Another consultant who looked after the NHS data back bone told me that surgeons were supposed to be able to request images prior to surgery and have them delivered to theatre. However the images weren’t prioritised and due to network traffic did not reach the theatre whilst the patient was being operated on.
Typical new Labour all headlines focusing on the inputs and rubbish delivery not focusing on the outputs.
In truth the income tax and NI system is a shambles with effective tax rates leaping up and down as actual income increases.
Simplifying the system, with £10k of free pay and a 30-35p rate above that, inclusive of employee NI. It would remove the upper earning cap on NI – which Brown sort of did with the 50p rate anyway – but we really should end the myth that NI is in any way “insurance”.
Couple that with a cap on pension relief at £100,000 gross and the whole system is cleaner, simpler and fairer. It will probably generate more tax receipts as well!
I agree with you John – the government should not own investment banks (or any other type for that matter) …
What I would like to hear from you, however, is how this came about. After all, no other major EU economy seems to have acquired such an extensive portfolio of state-controlled/owned banks of all types as the UK.
Allow me to give you a few helpful hints …….
Some people argue that this sad state of affairs results from these banks having made reckless loans secured on over-inflated assets.
Yes, that would in most part the great British housing market – this magical source of wealth for the British economy !!
And what exactly allowed this credit bubble to inflate to bursting point? Well, it would seem that regulation and control of consumer credit were somewhat deficient. Something to do with a light touch framework apparently …..
Very fortunately for some (including this humble poster), the sadly predictable outcome was so clear that great riches were earned from shorting the likes of Northern Rock ……..
So it would appear that the lack of an effective credit regulation system and the complete absence of control of the money supply (dear me, it sounds just like the great Lawson boom !!) ultimately caused the UK to have the largest state-owned/controlled banking sector in the EU.
Have I missed something?
Reply: Bad regulation, the failure to control cash and capital, lies at the heart of the crisis, as some of us warned at the time. I opposed the changes to the regulatory system in 1997 which set up the crisis, and forecast it in the Economic Policy Review in 2007.
albion Reply:
December 7th, 2009 at 4:16 pm
Should we therefore infer that Germany, France and others have a vastly regulatory system to that of the UK?
If so, we should welcome the appointment of Mr Barnier.
If the regulatory system was fit for purpose prior to 1997, how do you explain the Lawson boom?
StevenL Reply:
December 7th, 2009 at 8:15 pm
Are you saying it’s something to do with the homeowning culture that France and Germany don’t share? If you are I’d agree with you -
(although I wasn’t foresighted or experienced enough to cash in on this one – and was about 7 during the Lawson one – maybe next time for me)
Not a very popular thing for politicans to do, say that house prices are rising too much and land taxes are needed is it? You could argue that democracy is the problem I guess.
House prices are so high compared to incomes, and the is no wholesale market for risky mortage securities, that I don’t think we can have another housing boom and bust until the balance redresses itself.
I’m predicting a boom and bust based on emissions trading – providing middle USA can be persuaded to get on board of course.
Mark Reply:
December 7th, 2009 at 11:50 pm
The Lawson boom was another housing fiasco, confined mainly to the South East and East Anglia. It was fuelled by the well signalled intention to abolish double MIRAS relief for couples who had not taken out their mortgage before abolition.
It’s all of a piece with the “those with the broadest shoulders should bear the greatest burden” shtick. The government has been extremely successful in just one area of the financial collapse: sculpting bankers into a shape which allows them to be universally derided for the catastrophe that the country now finds itself in. The bankers can be merrily blamed for everything that has gone wrong and can be taxed accordingly, in a process of sidelining ministerial culpability.
Part of this sculpting is to make out that all bankers who receive bonuses are conducting high risk business that is almost certain to lead to the demise of the bank. Never mind that the business areas where the money is being made today have nothing to do with the excessive mortgage lending and associated structured instruments that caused the original collapse. Never mind that in many areas where the big bucks are being made, such as M&A advisory, the risk to the bank’s capital is very small. Or indeed that profits from foreign exchange trading or futures can be structured in a way to reduce the risks to the balance sheet. The shtick is too firmly established: bonuses bad, bankers evil; stone them, stone them!
Having made the error of buying businesses that should have been allowed to go to the wall, what does the government do? It’s stuck, of course. Now it is the major shareholder, and so carries the responsibility of appointing directors to make a success of running the business. Running a retail bank in today’s interest rate environment is a piece of cake – borrow at near zero percent from the government and lend to us mug punters at 5%, plus, plus, plus. Investment banking, however, is trickier, because it relies on highly skilled individuals who are, believe it or not, highly mobile. So the government is, or at least should be if the Conservative opposition was doing its job properly, in an acutely difficult position. On the one hand it knows that if it doesn’t pay out bonuses to people who have earned them, those people will leave and destroy the value of the bank. In that way it would be in clear breach of its fiduciary responsibility to the ultimate shareholders – us mug-punter taxpayers. On the other, if it does pay up then it will open itself up to the accusation of hypocrisy – that it is feathering the nests of the evil bankers.
So what does it do? It proposes LEGISLATION of course, the utterly typical and cynical course of action this lousy lot have pursued for more than a decade. Here comes the shtick again: “It’s the rich bankers who have caused this mess so let’s NAIL THEIR BONUSES. And while we’re about it, the rich generally have far too much money so we’ll TAX them because they have BROAD SHOULDERS.”
Well how about this as an alternative. Let’s tax Messrs Brown and Darling with their jobs. Let’s expose their hypocrisy for what it is. Let’s identify clearly that the cause of the collapse was their idiotic monetary policies and that the catastrophe of public debt that we face over the next couple of decades can be laid entirely at their door.
If anyone is still with me at this point, there is some important background argumentation. As always, the state seeks to distort what are in fact very simple issues. There were a number of banks that were badly run. Their shareholders voted the wrong people onto the board and failed to take action when the directors, who are employed to represent shareholders’ interests, took risks that were not commensurate with the rewards. The correct solution for this failure should have been insolvency, allowing successful competitors to pick up the pieces of the unsuccessful – as Nomura did with Lehman. The shareholders should lose their entire investment and the irresponsible executives should lose their jobs. End of story.
However, there is an unholy alliance between the state and the big banks, which the state relies upon to act as intermediaries in the process of printing and distributing fiat money (note that despite “inflation” staying in low single digits in recent years the supply of paper money has soared, hence the asset price booms that we have seen and continue to see). It was loose monetary control in the US and UK that caused the credit crunch. The bankers only did what a banker would logically do when the supply of state-controlled money was plentiful and cheap – lend aggressively and at too-low margins. Of course they made huge profits and bonuses in the “good” times – the governments of at least two of the world’s leading economies had put in place precisely the conditions that allowed them to do so. The presiding governments were, of course, more than happy at the time. If there is one thing guaranteed to keep a politician popular it is house price inflation. Far from condemning bankers, they were lauded – why else were so many gongs doled out to the likes of Fred Goodwin? The consequence of this state irresponsibility was of course a system that was indeed “too big to fail”.
In fact, of course, it is the government which should carry exclusively the blame for the disaster through its incontinent monetary policy and collusive relationships with the big banks. The correct free market mechanism to deal with the banking collapse would have been to do nothing at all. If the government had done so there would have been a period of extreme but very short term economic dislocation. By now, the financial services industry would be well on the road to recovery, with the riskiest and most poorly performing parts and participants excised by market forces and a more diversified and flexible setup taking its place.
PS. To anyone who has read this far, I am flattered. I would like to make it clear that I am not in line for any sort of bumper bonus so in that sense have no axe to grind.
Mick Anderson Reply:
December 8th, 2009 at 7:28 am
Hi Robert: I read your opus maximus twice, and thought about it overnight. Bask in the glow….
I’ve worked out why I’m not convinced by your claim that a completely free market for banking would have recovered by now – it’s the mirror image of Mr Browns approach to solving the debt crisis by borrowing more money.
We arguably have (had) the closest ever seen to a free banking market with light-touch regulation managed by the ineffective tripartite regulator. This resulted in massive leverage and lots of cunning ways to move money about the world, the banks taking a slice with every transaction. Due diligence was replaced by worthless insurance policies against default, and the banks were not obliged to understand or justify the risks they were taking.
With the active assistance of the dreadful Mr Brown, this has lead to the UK having a deeper and longer recession than much of the rest of the world. Perhaps this is evidence that with a completely free market, the recession would have been deeper, but not necessarily shorter.
The problem is that there are real people involved. Because the banks have helped towards their own demise, much of the population no longer trusts them to make sensible decisions. As such, we are now reluctant both to trust them with our money, and to allow them free rein in their recovery.
I suggest that a free market system (like so many other models) works better towards the centre of its working parameters than when heading towards an edge. A run on a bank is effectively the system falling off one of the edges of a parameter. If the UK had suffered the extremes of multiple bank failure under a completely free market, with our wages and savings being lost, our mortgages being under default because of non-payment, and being unable to buy food because of the collapse of the electronic money system, I think that the population would have been less forgiving, not more.
The financial services industry does not exist in a bubble, so can never be a completely free market. It has an effect on real people, so we need a steering system to keep it towards the middle of its operating zone; where it is effective and a real asset. We have the same problem with so much of Westminster living in an Ivory Tower – the threat of a General Election every five years is not a sufficient regulator against their excess.
I suggest that there could be completely free market banks, able to maximise their profits. However, before they can exist, there must be adequately regulated banks so that people can have some or all of their money protected. These protected banks should only be in retail services – the tax-payer should not be expected to support gambling with multi-billion pound stakes. The money in them would be backed by the Bank of England, to be funded by a levy on those banks within the scheme. These protected banks should not be owned by the tax-payer, but could be built from the wreckage of what we have been forced to own.
It’s typical New Labour to act first, think later. They should never have got themselves into this mess, but given that they have, I predict they will not successful legislate to prevent bonuses being paid – they will just drive them underground. Bankers are far more clever than a New Labour minister and will run rings around the government, eg by setting up an arm’s-length “non-bank” SPV and paying the bonuses through that; alternatively they could implement a temporary increase to basic salary – for one month only. The only way to win against a bank is not to play in the first place.
Why bring in legislation which will be challenged in the courts up to European level?
The government is the majority, if not the largest, shareholder in the worst of the bad banks. The government is therefore in a position to enforce it’s will where the public purse has a significant interest within present laws. Surely the action proposed by Darling is de facto nationalisation through the back door.
It is hard to think of a more effective way of driving the financial community out of the UK, with devastating results to the economy. No wonder Sarkovsky is dancing in the Streets of Paris- 200 years after Napoleon, perfidious Albion at last brought to heel!
First a disclaimer – I am not associated in anyway with the finance sector and have never received a performance bonus of more than 5-6%.
The government should have made reduced bonuses part of the rescue package in the first place. That they didn’t means they would have to break contracts to not pay the bonus. Inventing a new tax to target a specific group of people is also inherently wrong. If you tax the bankers, why not other civil servants who receive a bonus. What about those senior civil servants who received well over 10% pay increases over the last year or so when inflation was far lower? What about CEO’s and senior Execs who pay themselves bonuses and high salaries even when their business is failing?
If the people allocated these bonuses are responsible for the RBS and LLoyds failure I don’t believe they should receive a bonus at all, but a contract is a contract. To my mind the government has failed utterly and pay up. Of course they can renegotiate the contracts though they are leaving things a bit late for this year as well.
By not admitting their mistake and taking a path to reducing future impact but then employing very questionable means to tax individuals the government will drive those that can to leave the country and those that can’t will see that ethical behaviour is no longer required or enforced.
I and others have suffered greatly because of the lack of ethics of some odious so-called professional business people. We need government to enforce ethical behaviour not promote even more disgraceful behaviour.
I feel the furthest they can go is to pay the bonus but ensure it is completely taxed at UK rates. I also feel the board of RBS especially should be fired for cause since they clearly did not discharge their responsibility properly by allowing such huge loses in the first place.
If the government wants to create some new laws then I suggest something to tackle “reckless endangerment” and “moral hazard”, though I guess the latter is more meat for contract law. These laws should be applicable to private and public sectors, even to ministers of the crown.
A maybe a bit biased, but taxing bonuses does seem a bit punitive. Reminds me of the windfall tax on Oil producers years ago. Its makign the UK less attractive to do business. Have a debate on ‘too big to fail’ and separate wholesale/investment banking (though that wouldn’t have saved HBOS or Northern Rock, neither had investment banking arms), for sure, but this seems to be populist nonsence, as somone who is a regular employee of a bank and not some multi-billionaire, I think the UK government should take a look at themselves: stealing pensions and allowing rampant house price speculation that caused this problem – they could solve both those issues with the same piece of legislation. And in doing so, encourage people in the UK to actually save for their pensions instead of assuming trading houses is the perfect pension plan.
I am about to reveal my ignorance of the way bank taxes work.
If I were a greedy banker, and the government decided to tax my bank I would pay the tax out of the banks funds and still give myself the huge bonus. Because the government has been so stupid in bailing out my bank, they would have to reduce the tax to avoid my bank going under. I would just sit there with my enormous amount of money, in a bank that the government has made fireproof. How could this be avoided?
It’s all about as well organised as Napoleon’s Retreat From Moscow. And all we need is a really bad winter spell to really do the damage.
I’ve concluded that the greatest problem facing the UK is the huge debt that is accruing. I really think most of us haven’t grasped what this is going to do long term to the infrastructure and services of the UK, not to mention unemployment.
If Conservative and Liberal Democrat leaders and MP’s were really serious about the urgency of this, why don’t they resign their seats and put their solutions to the electorate thus forcing the governments hand?
If this really is as big a crisis as it looks, surely some kind of radical action is called for. Can the nation afford to wait till June 2010? What do other’s think?
I imagine the tax accountants will see any legislation as a bonus, even if the bankers don’t. I can see plenty of scope for avoidance. When are the bonuses paid: can they be speeded up or deferred for a year in order to miss the tax. Also, what about traders who enter a contact for their services, rather than becoming employees?
I agree that the easiest strategy would have been to forbid bonuses by banks in receipt of taxpayers’ money, but this would have required foresight and openness by the government. Enough said.
I must crib from another comment on another site, but it seemed appropriate. If not paying the bonus’s means we lose the same investmant bankers who bought shedloads of useless debt from the Americans, then overall whats the problem ? what will be on their cv’s ?
Perhaps a clearout is necessary, replace them with new people can they be worse ?.
Correct me if I’m wrong but aren’t bonuses already liable to tax?
66% if you include employers and employees national insurance contributions.
So how much more does dear Darling want?
You raise an interesting point: what actually is legislation for?
I am afraid that even under John Major, legislation was used sometimes to solve problems as they came up and to get the government into the papers in a good light. (Dangerous Dogs Act, Guns banned after Dunblane).
Mr Blair made this into an art form. Legislation stopped being commonsensical or even just, and soon turned into the Front Page story for tomorrow. Because we, yes, we, gave him his huge majority, it was so easy to pass silly laws.
Mr Brown, of course, follows the precedent. And here we have a blinder: the wicked Banks take the blame where really it is the government to blame for propping them up. Banks ought to have been sold yonks ago.
One thing I really loathe is “Wosn’t me it woz ‘im”. Why can’t Mr Brown – so quick this morning to preempt the Chancellor’s speech – take the blame and put matters right?
I would like to see preparation for the next bail out to start now. I appreciate I am assuming that there will be another crisis in the future but history does support this. Investment banks pay large sums in salaries and bonuses to attract enough people to work in their organisations and deliver the income – but at what risk? We found that out recently – even (a well respected bank-ed) would have gone under without support. I would like to see an equal amount of cash as paid out in bonuses (and for that matter pay above a set limit – let’s say an MP’s salary) passed to the UK Taxpayer and held in escrow. This fund would be then available for subsequent recapitalisations and go some way to reflect both the implied and explicit taxpayer guarantee. Capital adequacy rules already take into account “standard” lending to trading businesses. If a firm (words left out) decided they did not want the implicit guarantee, they would have to turn themselves into unlimited liability partnerships and declare to the world that counterparties who decide to trade with them do so at their own risk but with recourse to the “partners” in the firm and all their assets. I believe this would focus the mind sufficiently and then let them get on with it.
First define ‘Banker’.
Simple. Bankers’ bonuses are income and should be taken as such. What bonuses are paid by banks, such as Barclays, which have not held out their begging bowl to HM government, is non of the Treasury’s damn business. All that is required is for the government to say that it will not bail out such banks.
With RBS and Lloyds/HBOS, if I were you I wouldn’t start from here. To be constructive, if bankers are paid bonuses when investments appreciate, they should be paid negative bonuses when investments depreciate. I might back such a scheme, which would mean bonuses being paid a couple of years in arrears, so as to balance out the good and bad years. The key evaluation criterion might be: have your investments beaten the FTSE index?
Just as an aside I found particularly funny. In this mornings Telegraph there is a list of various debts that have now been shifted by RBS into the asset insurance scheme. One of them is £3bn worth of loans to hedge funds, half of which has gone to funds located in the Cayman Islands. We are now insuring massive loans to funds in offshore tax havens with our tax receipts.
You couldn’t make this up!
I do not understand this.
If the Government owns the banks – as in, has a controlling shareholding, which I believe is the case – why do they not call a shareholders’ meeeting and pass a resolution saying there will be no bonuses.
The directors can like it or lump it or leave – the business, any business, belongs to its shareholders. They call the shots.
What’s wrong with this picture? Am I mistaken, or is it political thing as in “Oh my goodness you could never do that”?
You are of course quite correct that the best solution is for inappropriate bonuses not to be paid in the first place. We now know that Darling is considering a windfall tax instead of trying to define inappropriate bonuses. This is also not an intelligent approach, since the whole purpose of allowing banks to operate in markets rigged in their favour is to permit them to recapitalise, and taking taxes from them simply means that we the customers will be suffering a longer period of no competition fat banking margins. Of course, large bonuses also impact on the cash available for replenishing the balance sheet.
The logic suggests that bonuses should instead be converted to equity, locked up for say 5 years. That way, the cash is not lost to the balance sheet in the shorter term, and the payout will reflect the banks’ performance over a longer span of time.
Mark Reply:
December 9th, 2009 at 12:41 pm
Of course, the biggest and best stick is the threat not to provide any state bailout, or to cut back on it where already given. So much could have been achieved with more subtlety if the Old Lady were still permitted to tighten the corset, and to raise her eyebrows.
If I work very hard and efficiently on a fortunate project I might get a modest bonus from my employer. We also get a small Christmas bonus, all of us, depending on how successful the whole concern was. This is taxed along with all other income.
No success = no bonus
Am I missing something?
Dear Mr Redwood,
Whilst I agree with most of your opinions, as a UKIP PPC I differ on how we can best reach the goal of establishing our role in the EU.
However I disagree on your views on bankers’ bonuses.
(Refers me to a website I don’t have time to check out – it is helpful if people summarise their view for all to see here-ed)
Kind Regards
Tim
It’s really interesting…, Great advice!
Great comment, love the design of the site too.