Question Of Bank Bonuses Rumbles On Towards The G20 Meeting

by Ulrika Lomas, Tax-News.com, Brussels

03 September 2009

From the US House of Representatives to Nicolas Sarkozy, Angela Merkel, Lord Turner, and Gordon Brown, the movement for action to limit the size of bonuses afforded to bankers appears to be gathering momentum ahead of the forthcoming G20 meeting.

At their last meeting in April, the leaders of the G20 agreed to “tough new principles on pay and compensation.”

The G20 final communiqué issued at the time announced that: "We have endorsed the principles on pay and compensation in significant financial institutions developed by the Financial Stability Forum to ensure compensation structures are consistent with firms’ long-term goals and prudent risk taking. We have agreed that our national supervisors should ensure significant progress in the implementation of these principles by the 2009 remuneration round.”

Since then, there have been many protests against the re-emergence of large bonuses being paid by banks. However, while the above principles are held to remain valid, and politicians of all persuasions, and from all countries generally agree that excessive bonuses should be discouraged, the ways to achieve that end are not so clear cut.

In the US, the House of Representatives had already passed a bill in March, trying to impose a tax on bonuses paid out by firms that had received bailout funds from the US government. The Senate did not follow their lead but, since then, the Obama administration has appointed a “pay czar” to overlook the pay proposals of firms that have received special official support, and the House of Representatives has voted again, this time to try and stop banks paying bonuses that could encourage the taking of excessive risk.

In Europe, meanwhile, France’s President Sarkozy has been at the forefront of the movement against bank bonuses. He has reached an agreement with the French banks to defer two-thirds of bonuses paid for three years and to make a third of any payout in bank shares.

The deferred bonus would not be paid if the applicable trade was found to lose money in the succeeding period, and the government would not work, he said, with banks that did not apply the new rules.

He has also reiterated, according to reports, that the statutory capping of bonuses, either by restricting them to a lower percentage of bank revenues than is presently paid or establishing some other ceiling, and a possible tax on bonus payments, would be discussed at the next G20 meeting. And, at a recent meeting in Berlin, he appears to have enlisted the support of Angela Merkel, the German Chancellor.

Lord Turner, Chairman of the Financial Services Authority (FSA), seems to have picked up the baton in the UK, meanwhile, and in a recent interview with Prospect magazine, he floated the idea of a tax on financial transactions, if increased capital requirements were insufficient to rein in dangerous risk-taking and speculative activity by banks and other financial institutions. Such a tax would reduce bank profits, thereby reducing amounts available to be paid out in bonuses.

For the UK government, however, Prime Minister Gordon Brown is reported to have rejected calls to set limits on salaries. While agreeing that bank bonuses remain too high, he and Alistair Darling, Chancellor of the Exchequer, appear to prefer the establishment of a link between bank profitability and bankers’ pay.

They have not suggested a particular solution but, instead, are proposing that the G20 should initiate a discussion on what that link should be.

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