Under a new deal reached by countries of the European Union, performance-related bonuses from financial institutions in member states will be capped at equal to one year’s wages, rising to a maximum of two year’s wage if granted explicit shareholder approval. This decision is potentially toxic to the British economy.

It is ludicrous to suggest that capping performance-related bonuses will lower the overall take-home pay for bankers. It will merely rebalance pay packets in the favour of salaries, ensuring that a smaller percentage of bankers’ pay will be subject to performance.

The standard response to this is to cite the example of Lloyds Banking Group, who made the decision to pay £365m in bonuses in 2012 in the same year that the bank reported losses over £570m. As if every single employee who was paid a bonus was directly responsible for the loss of that money. The performance related pay is based on the performance of the individual, not on the bank.

Under these new rules, European financial institutions would be forced to pay their bankers more, regardless of their performance. This will result in far too many overpaid, under-performing employees sitting on their positions whilst their successful co-workers are headhunted abroad and promised bonuses that will reflect their superior performance.

It is dangerous and irresponsible for any government to attempt to cap or structure the pay of private companies. We live in a capitalist society that is part of a competitive international community. Government regulation of financial institutions (e.g. as per the Vickers report) is essential to protect the interest of citizens, but this should certainly not extend to pay.

Photo: rockcohen

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