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 its governor. “What we have been pushing for is for banks to use shares or other non-cash bonuses that can be clawed back if something goes wrong.”
Thankfully, regulators also got those clawback measures. If reckless risk-taking or rule-breaking has reduced (a questionable claim), it has been achieved via malus clauses and suchlike, plus tougher capital-allocation rules that made some activities not worth pursuing. The bonus cap has been incidental. So, fine, abolish it; it doesn’t really matter. In any case, overall remuneration for London investment bankers is set in practice by rates in New York.
But here’s the second point: other elements of Kwarteng’s deregulation package for banks definitely will matter. Under the banner of making the City more competitive, we may be about to be hit with proposals covering everything from solvency ratios to capital-location regulations to rules on trading books.
Some of the changes he proposes may be mere technical tweaks, but some may represent a step back towards the “light touch” era that led to the crash of 2008-09. We await details, but one fears the politically toxic, but mostly irrelevant, bonus cap will get 90% of the attention. The dangerous stuff – potentially – will lie in the boring but very important 10%.
Christmas cheer may be in short supply at John Lewis
Still on bonuses, staff at the John Lewis Partnership should not raise their hopes. “A substantial strengthening” in the group’s performance “beyond what we normally achieve in the second half” would be needed to afford a bonus this financial year, said the chairman, Sharon White, as the first-half loss widened to £99m.
That wording looks more carefully crafted than the usual exercise in managing expectations. One can see why: the department stores produced a flat operating performance but like-for-like sales at Waitrose fell 5%. Part of the latter was simply the unwinding of Covid factors but the chain is also having to sharpen prices for consumers.
It is hard to spot reasons why Christmas would be substantially better than normal. In the circumstances, an immediate one-off cost-of-living payment of £500 for staff is the right approach for a worker-owned business.
Will new Shell chief deliver on predecessor’s climate pledge?
A good point by Follow This, the Dutch shareholder activist group: Ben van Beurden, stepping down as the chief executive of Shell at the end of this year, did nine years in the job; so, if Wael Sawan, the new boss, survives as long, he will still be around when the company has to deliver on a hard climate target.
Shell’s big-picture goal is net zero by 2050 but the interim one sees a reduction in absolute emissions by 50% by 2030, compared with 2016 levels. Sawan may thus be the first “big oil” chief in the position of having to fulfil a predecessor’s climate promise personally. Deadline pressure can be helpful (we hope).
