From the TUC

What should be done about bank bonuses?

20 Oct 2009, by in Economics

There have been hints in the media that the government is considering a windfall tax on bank profits (repeating what Sir Geoffrey Howe did in the early 1980s) though it looks rather like there have been efforts to close this speculation down today.

It looks rather like ministers are caught between wanting to respond to public anger at excessive bonuses and wanting to “allay City fears that Labour is planning a big pre-election cash grab”, to quote from today’s FT.

There may well be a case for a one-off windfall tax on profits – particularly if its proceeds are put to good use – but it is not a good way to deal with bonuses. 

Most obviously, as David Prosser writes in today’s Independent:

Even if the Treasury were to come up with a way to target only banks earning excessive profits with a tax – and it’s a big if – a windfall tax would do absolutely nothing to prevent big bonus payments. Banks’ profits are calculated after they’ve paid out bonuses, so you might even see the bonus pot increased in order to reduce the tax bill.

Bonuses have been attacked for many reasons.

First is the simple outrage that people can get paid so much for taking risks with other peoples’ money. Goldman Sachs are putting aside £14 billion for their bonus pool this year. It is easy for people’s eyes to glaze over when faced with big numbers but £14 billion is about the amount raised by a 4p increase in the income tax rate, or enough to give everyone at work more than a £500 one-off bonus.

Most people at work do a reasonable job without getting much in the way of performance related pay. Good managers and organisations know that people want more from work than money – and as long as there is a general sense that pay is fair – most people are motivated by a much bigger range of issues, for example a simple chance to take pride in a job well done.

Indeed bonuses are unpopular with most people who get them in banks. That is because low and average paid staff are “incentivised” through bonuses and commission based pay to sell banking products, whether or not they are appropriate for the customer.

But it’s possible that top investment bankers are toads rather than human beings and are only motivated by cash. It’s still not clear why they need so much. I suspect many are more concerned with their place in the pecking order, rather than their absolute level.

People are even more outraged this bonus season. While few may know what a CDO is, they do know that this recession was caused by a financial crisis. They also know that they have had to fund a huge injection of cash to stop the banking system collapsing and that many, many people are suffering from unemployment and short-term working caused by the recession.

It is understandable that a windfall tax on bank profits is popular, but bonuses are a symptom of a much wider problem with the banking system. Indeed the strongest case against a tax is that banks need this capital to restore their balance sheets after all the dody lending and thus encourage them to lend.

But whether or not there is a windfall tax this year – though I would prefer one on the bonuses rather than bank profits if feasible – a one-off tax will not deal with the problem.

As Polly Toynbee argues, there is now a structural problem with bank taxation. The huge losses they suffered can be offset against tax  so we need some root and branch reform of bank taxation.

But the real problem with the banks is the huge profits they make in the first place. I have no doubt through my pensions savings that I own a tiny bit of a few banks. Why is it that the banks are allowed to retain so much of the profits they make and pay them to their mates, rather than give them to their shareholders, and in a tiny way make my retirement more comfortable? Bank shareholders – often the savings of average earners – took a pounding when they crashed.

Yet while I can dream of banking bonuses trickling down to my pension, the bigger question is why do banks get to make so much money in the first place?

Or as Anthony Hilton puts it in a splendid article in yesterday’s Standard:

Trying to press down on bonuses will never work because it addresses the problem from the wrong end. The real challenge should not be finding ways to stop bankers taking a significant slice of the profit they generate. It is working out why profits are so high in the first place, and then having the nerve to do something about it.

Why is there so much money around which allows these bonus levels in the first place? How can the banks make so much money from performing such mundane activities in what is supposed to be a competitive market?

And, as former Cazenove senior partner Robert Pickering recently wrote in a letter to the Financial Times, why do customers of the City pay so much for what in most cases is a fairly commoditised product routinely delivered?

The answer is threefold. Bankers overcharge massively for what they do, their sector is nowhere near as competitive as they pretend it to be, and most of the people paying the bills, be they investors or companies, are not doing so with their own money.

And if banking stopped being a source of unjusified super-profits then its wider pernicious effects on the economy would disappear too. No longer would it hold such sway with government, no longer would it attract the best brains and the brightest graduates (possibly to turn them into toads) and no longer would we neglect the other wealth creating partes of the economy.

One Response to What should be done about bank bonuses?

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