I CAN PICTURE it now. Bankers have their bonuses capped and deferred for 10 to 15 years. They’re paid in knock-out stock option-linked notes or newly created layers of first-loss super-subordinated bail-inable debt. Their fixed salaries can be clawed back. There’s a limit of what cars they can drive, and how much they can spend on houses and snappy suits. And there’s a motion in the European Parliament to place birthday presents for their children under the clawback mechanism too.
Is this how far we need to go to stop the public policy machine spluttering ever on in its thirst for retribution over bankers’ pay? Politicians, central bankers and others have an insatiable appetite for the topic and seem hell-bent on seeking out ever-more Byzantine ways of cutting comp, clawing it back, deferring it for ever-longer periods and coming up with more convoluted ways of paying it. And of prolonging the pantomime notion of bankers as bad guys.
On November 20, European Court of Justice Advocate General Niilo Jääskinen derailed UK finance minister George Osborne’s challenge to EU bonus cap rules. That came just days after the Bank of England governor and Financial Stability Board chair Mark Carney tabled the notion of going beyond bonuses and eating into fixed salaries via partial payment in non-cash instruments. Carney likes New York Fed president Bill Dudley’s idea to have long-term performance bonds as currency that can be clawed back.
Hiking fixed costs will not just reduce the claw-back pool but do nothing to prevent financial system endangerment
WE ALSO HAVE the recent FSB proposal on loss-absorbing capital that says higher bank funding costs can be mitigated by a fall in, inter alia, employee remuneration. And the European Banking Authority, in its mid-October report on remuneration and allowances, sought to eliminate the role-based and market-value allowances paid to bankers on top of their salaries, which it says are intended to circumvent the bonus cap. It just never ends.
Jääskinen’s baseline assumption, essentially following the EU’s line, is that poor design of remuneration schemes was a major contributor to the global financial crisis. I think the world is done with retelling how the crisis happened, and I don’t buy and have never really bought comp as a central theme – it’s just too facile. As such, his conclusion was no real surprise. But it did strike me that his opinion played directly into the point of the UK government’s suit, so in essence it was all a bit circular and got us nowhere.
Jääskinen said EU legislation limiting the ratio of bankers bonuses compared with their basic salary was valid. “Fixing the ratio of variable remuneration to basic salaries does not equate to a ‘cap on bankers bonuses’, or fixing the level of pay, because there is no limit imposed on the basic salaries that the bonuses are pegged against,” he said.
“The 100% ratio introduced by the legislation can attach to any sum of money that a bank is prepared to pay by way of fixed salary. The fact that this ratio can be increased to 200% or fixed at a rate lower than 100% by the Member States underscores the absence of any ‘capping’ effect. As there is no legal limit to the basic salary that can be paid, there is no limit to the total level of pay.”
THAT’S ALL PATENTLY self-evident but I’m not sure that was the point of the case. So what now? Is he implying that banks can and should massively up salaries? Of course they certainly can do that, but this runs contrary to the EBA’s efforts to stop the drift to higher fixed salaries and ironically dovetails with the point of the UK government’s suit, which was that the bonus caps will have unintended consequences and that hiking fixed costs will not just reduce the claw-back pool but do nothing to prevent financial system endangerment.
The UK’s challenge had to be mounted on technical and legal rather than in-principle grounds and in truth never looked that convincing. But the rejection of every single point of the government’s case was a political embarrassment. I couldn’t care less about that, but I do care that the UK vs EU farce has got us nowhere.
And now the industry has to contend with what I thought were deeply worrisome comments made by Mark Carney in his “Future of Financial Reform” 2014 Monetary Authority of Singapore Lecture on November 17. Carney tells us the Bank is “consulting on extending deferral periods, widening the scope for groups of employees to have their bonuses reduced where there are more pervasive issues of performance or risk management, and considering options to prevent individuals side-stepping these rules”. Pretty hard core.
But he goes on: “It is unfortunate … that new European rules to cap bonuses … have the undesirable side-effect of limiting the scope for remuneration to be cut back. This makes the case for additional reforms to ensure that the burden of excessive risk-taking and misconduct by staff can still be borne by those staff. Standards may need to be developed to put non-bonus or fixed pay at risk.”
This is preposterous. Who knows, maybe he was incensed by the FX fines but Carney should nonetheless stick to his day job and focus on getting that right rather than lashing out in this way. I continue to find the extent to which people are prepared to blame bankers’ comp for pretty much everything that’s gone wrong with the world in the last 10 years astounding. This obsession needs to end.
