Why Kwarteng’s focus on bankers’ bonuses is a strange fight to pick
Kwasi Kwarteng’s proposal to remove the cap on bankers’ bonuses is an odd political fight to pick. Inflation at 9.9% is tearing chunks out of the real-terms pay packets of the vast majority of the population who never get a sniff of a bonus, even in good times. The idea that freedom to shower bigger bonuses on City bankers represents a “Brexit dividend” will strike many as ridiculous or offensive. The optics, in political lingo, are terrible.
But here’s the thing: on the pure logic of the matter, the chancellor has a point. The design of the European Union’s bonus cap was always clunky and there is no evidence it has reduced risk-taking by banks, which was meant to be the aim. The problem, as rehearsed here at the time, is that the “waterbed principle” applies: push down in one area of pay and another goes up.
The cap, critically, did not set a constraint on how much a bank can pay an individual. Rather, it limits the bonus portion to two times the employee’s salary. So banks – shamelessly but predictably – increased fixed pay. In 2014, the chief executives of Barclays and Lloyds Banking Group were given £1m salary increases dressed up as “allowances”. At HSBC, the fixed pay of the boss – the minimum he would earn – increased from £2.5m to £4.2m. Similar manoeuvres ricocheted though remuneration structures lower down the organisations.
As UK regulators fretted at the time, the cap had the perverse potential to make banks less flexible in a crisis. Their fixed costs went up, limiting their scope to preserve capital by slashing variable distributions if told to do so. “Once you give more fixed pay you cannot get it back,” said Andrew Bailey, the head of the Bank of England’s Prudential Regulation Authority at the time and now
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