Countering the myths that bankers will leave if bonuses are reduced

There is widespread anger because bonuses are out of proportion with average incomes, reasonable reward, or the perceived social usefulness of banks.

Duncan Exley is the campaign director for One Society

When George Osborne today announced an increase in the bank levy, he also conceded he had not yet struck a deal on limiting bankers’ bonuses, nine months after the coalition agreement promised:

“…robust action to tackle unacceptable bonuses in the financial services.”

There is widespread anger because bonuses are out of proportion with average incomes, reasonable reward, or the perceived social usefulness of banks.

Despite this, and the person-hours spent exploring options, we still do not have even a weak response to astronomical bonuses. This suggests we need to institutionalise some checks and balances, to avoid an annual ritual of calling for a steam hammer to crack a nutty level of pay and bonuses.

One precondition for this would be for the government, opposition and commentators to counter the “big-bonuses-are-necessary” myths with evidence. One common myth is that bankers would leave if bonuses were reduced. However, recent research by eFinancial Careers confirmed that:

“The fact the payments are higher in London pours cold water on the claim that bankers would leave Britain for jobs overseas if they were not paid big bonuses.”

i.e bonuses can take quite a cut before bankers are tempted to move elsewhere. Where bonuses have been restricted, some in banking admitted that this caused:

“…no problems recruiting a bumper crop of talent.”

The other big  myth, that bonuses improve performance, is contradicted by academic psychological research commissioned by the Federal Reserve Bank of Boston:

“…for tasks that include a cognitive component, there seems to be a level of incentive beyond which further increases can have detrimental effects on performance.”

This suggests that raising low pay may be beneficial.

Beside myth-busting, the composition of the groups who scrutinise and decide high pay and bonuses should be broadened. This could include:

• Mandating the inclusion of investor and employee representatives in remuneration committees, and instituting equivalent structures to scrutinise and set bonus strategy;

• Requiring the highest bonuses to be revealed in annual reports, alongside the ratio between an organisation’s top and bottom remuneration rates; and

• Requiring investors to report how they have voted at AGMs, as advocated by Fair Pensions and others. In the case of banks, major shareholders include our pension funds and our government: shouldn’t we be told how they are using the votes they cast on our behalf?

The current BIS review, ‘A Long-Term Focus for Corporate Britain’, to which One Society has responded, has begun to ask whether broadening the group of those who scrutinise and decide remuneration rates would be helpful, though some lobby groups have warned against such moves, fearing results that appear similar to the mythical spectres discussed above.

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