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If The Cap Fits, Pay It

Over the last few years, investment banks and investment bankers have turned into public enemy number 1, a cross between Jack the Ripper and Judas Iscariot. There’s no doubt that the way in which investment banks were rewarding employees caused significant damage. Given the public opprobrium and pressure on the Government to tackle matters, bonuses are already declining massively in the City. It now looks like we are to have a bonus cap from next year.

Last week The European Parliament voted to limit bankers' bonuses in EU banks. To curb speculative risk-taking, the agreed basic salary-to-bonus ratio will be 1:1. This could be raised to a maximum of 1:2 if approved by at least 66% of shareholders owning half the shares represented, or of 75% of votes if there is no quorum. To encourage bankers to take a long-term view, a minimum of 25 % of any bonus exceeding 100% of salary, must be deferred for at least five years.

The legislation will require banks to disclose profits made, taxes paid and subsidies received country by country, as well as turnover and number of employees. From 2014, these figures should be reported to the European Commission and from 2015 made fully public. Banks will be supervised by national banking authorities in collaboration with the European Banking Authority (EBA),whose supervisory powers will be expanded.

But is this a good thing? One MEP says it’s not enough. Another commentator says capping bonuses is an irrelevance. The Government fears it will have so much impact that it will drive the financial markets out of London.

Earlier this year The Wall Street Journal ran an article suggesting that the best young minds are leaving the banks, or are not attracted to the industry anymore. The cause is thought to be years of losses, scandals, bad press and the way that new regulations that have curbed activities. Amongst others, former U.S. Federal Reserve chairman Paul Volcker argues that innovation has little place in the financial sector, and having more conservative bankers and fewer heavy risk takers running Wall Street will reduce the chances of another blow-up like the financial crisis. They consider it will also help to increase wealth generation in more important parts of the economy, such as manufacturing and software.

From an employment point of view, what impact will it have? Clearly those who work in this environment are motivated by cash and lots of it. Will a cap of this type damage investment banking as a career? Will we lose a lot of talent? Will banking be as attractive a prospect for young, bright graduates?

It’s impossible to give a straight yes or no. We can only give rewards that are affordable and don’t damage the economic and social structure around us. It’s not the bonuses that were the problem so much as the way in which employees were permitted to earn them. If the effect of investment banking is to slash and burn the economy (as it formerly did),the bonuses are unethical, unmerited and shouldn’t be paid. But if the system supports and builds the wider economy in a healthy way, there’s no reason why bonuses shouldn’t reflect the value they bring in. If there is a cap, it may reduce the attractiveness of the career in the short term, but investment banking is still a highly–paid job and good jobs are hard to come by. It probably won’t take too much of a dent in its recruitment.

If you need help with recruitment or rewards, or any other aspect of HR get in touch.

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