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Bonus caps legal action sends out wrong message

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Treasury's legal challenge to EU capped bonuses comes in same week NHS workers told about potential pay freeze.

The Government’s legal challenge to EU plans to curb bankers’ bonuses may anger taxpayers, but for City HR directors there is a genuine fear that capped bonuses could lead to an exodus of talent.

New EU rules, which come into effect in the 2014 bonus season, will cap bankers’ bonuses to 100% of their salary, or 200% with shareholder approval.

This week, Treasury argued that such caps will only drive fixed salary inflation and make banks less stable, as it would become much more difficult to claw back remuneration at times of stress.

Another reason for the challenge is a fear that curbing bonuses could affect London’s competitiveness as a global financial services hub; the British Bankers Association notes two-thirds of those affected by the cap are based in London.

City banks have international workforces and moves to restrict earning potential could lead to some seeking fortunes in less regulated financial centres outside Europe, including Hong Kong and Singapore.

Bonuses do not equal stability

Treasury’s assertion that fixed salaries will escalate is hard to argue against. City banks will continue to reward their top talent by forking out huge pay packets in order to retain them, whether this is in the form of larger fixed pay or generous incentives (bonuses et al). There are signs salary hikes are already taking place in anticipation of the new rules.

What is more difficult to swallow is the notion that trying to curb excessive bonuses will make banks riskier. Bonus culture, and the poor regulation of it, has been a serious problem for the financial services sector, encouraging short-term profiteering at the expense of long-term stability.

The UK has made some positive steps to reform risk-taking by limiting upfront cash bonuses and linking bonuses to longer-term success.

However, few outside of financial services will have sympathy towards capping bonuses at 100% of what are already generous pay packets.

The wrong message

What will rankle the public even more is the Government’s use of taxpayers’ money to defend well-paid bankers at a time its own austerity measures continue to bite public services. Questions need to be raised over why money is going towards this legal challenge while being stripped elsewhere.

For example, this week NHS Employers recommended 2014 pay freezes for NHS staff, with CEO Dean Royles saying a pay increase is not appropriate because funding is tight.

The banking sector is not solely to blame for the financial crisis and it should not be weakened as some form of pay back. But if bonuses contributed to the crisis and are in need of reform (the UK is the only country in Europe opposed to these new rules), the Government should explore ways to further enhance banking culture, of which remuneration is an important part.

The challenge for HR is how to foster cultural change while having the levers in place to attract and holding onto top talent.

Spending public money to defend the status quo in a European court doesn’t help. It sends the wrong message to the public and bankers alike, placing HR between a moral rock and a retention hard place.