According to an April 1, 2013 article in Financial Times, “the UK’s opposition to the new EU-wide cap on bankers’ bonuses was swept aside in an otherwise unanimous vote in favour of the new rules. The EU-wide cap, effective next year, will restrict bonuses to the same level as salary, or at twice that level with explicit shareholder approval”.
And it’s not just bankers, according to a March 24, 2013 article in the Financial Times, “Sven Giegold, the German Green party MEP spearheading the legislation, is believed to want to extend the proposed bonus caps to hedge funds, and other vehicles such as private equity funds, covered by the EU’s Alternative Investment Fund Managers Directive.”
Oh dear, such dire circumstances for the EU bankers (the majority of whom are in London). Will this harsh punishment turn EU bankers in the next Oliver Twists begging their strict regulators for just one more bowl of gruel (or a richer pay package)? Well, probably not.
But the key issue is will this approach work? It is based on the premise that bankers take too much risk to make too much money. But, since in the EU there is no equivalent of the US tax code’s 162(m) limitation, all the banks have to do to circumvent this is to raise base pay. And, according to Grahall’s Garry Rogers, “The EU is concerned about the leverage in the financial services industry. They are trying to address that by pulling on the switch labeled variable pay.”
Rogers goes on to say that “obviously the objective is correct for the fact that the way bankers are compensated has led to greater risk taking.” The EU hopes that by changing pay it can change behaviors, and we agree with that. However, the approach they are taking is not “surgical”, and may not even work because it can be circumvented. Regulators’ attempts to get companies to pay bankers less may just result in those companies paying bankers differently and with little consideration for all the pay elements, or the environment, or the stakeholders, or the business strategy… These actions and reactions are likely doomed to fail. The Artful Dodger would do a better job.