The law of unintended consequences and the bankers bonus Cap

There have, not surprisingly, been howls of outrage at the suggestion that the cap on "Bankers's Bonuses" should be removed.

The optics are absolutely terrible. At a time when many people are struggling, the idea of removing a cap of 200% of base salary on the amount which can be paid in Performance Related Pay, which will be presented as enabling Bankers, not the most popular group in the country, to be paid even more, is going to go down like the proverbial lead balloon.

For that reason, it probably won't happen: the economic benefit from scrapping the law is likely to be much smaller than the political cost.

This will probably therefore not be a popular opinion, but this cap has been completely ineffective and, falling foul of the law of unintended consequences, had exactly the opposite impact to what was intended. This rule is a complete nonsense which far from curbing the remuneration paid to bankers has probably increased it and landed the banks with a more expensive cost structure.

The rule limits the ratio of the performance related element of remuneration, or "bonus" to no more than 200% of base salary. But it does not stop the employer increasing the base salary.

In consequence this rule, originally introduced by the EU about eight years ago, does not appear to have prevented the payment of a single penny to bankers or anyone else. Instead, the effect was that a higher proportion of the money the banks paid out in remuneration had to be included in the base salary to reach any given level of total expected payment.

Guess what that means. When the COVID recession hit, and therefore the banks made less money, they will have paid out less in bonuses - but because the proportion of remuneration which comes in bonus rather than salary is lower than it would have been without the cap, the banks will have ended up paying MORE because of the cap than they would have.

I suppose they may have made up for the difference by making more people redundant. Ah yes, I hear the cheers - fat cat bankers losing their jobs! But this means fewer people paying tax and more people claiming benefit. It's not a win for public services or for Great Britain PLC. 

I am tempted to say that Kwasi Kwarteng should go ahead and scrap the cap, not so that banks can pay higher bonuses, but so they can pay those bankers who don't earn their bonuses less in salary. 

However, you can bet your life that if the chancellor does scrap the cap, the media will have an easy hit. They'll find instances of people who were already getting an enormous package, and who then get a huge increase in their bonus after the cap comes off. Then they will run attack pieces contrasting the vast increases these bankers are getting with comparatively tiny increases paid to people in jobs essential to society who are on much lower incomes and are fighting to get even a wage increase which keeps up with inflation.

And it will look like a powerful point. But if you want to do something about that particular inequality, a cap on bonuses is still a daft piece of incoherent virtue-signaling stupidity which sounds good to many people but has done nothing at all to correct the inequality they want addressed. If you wanted to really do something about the inequality issue you would have to impose some sort of cap or control NOT on bonuses but on the total remuneration package. 

I will bet you that no mainstream political party will have the guts to propose that.