I last wrote about bonuses and bankers’ pay more than six years ago. In the second half of the article I remarked in passing that:
It makes no difference whether high remuneration is paid as a bonus or as regular pay. It would be relatively straightforward to remove all bonuses without affecting the amount anyone was paid. That would certainly not help. Indeed the whole point of “bonuses” – effectively pay whose precise quantum is only set when it becomes clear how much the bank can afford – was to enhance the financial stability of the bank.
At the time I commented on the problems that particular words can cause in public debate, but unfortunately it is not quite that simple. The problem is that the level of public debate is depressingly low.
If something sufficiently dramatic happens, then most people will notice it and get to first base. In this case the collapse of Lehman Brothers was sufficiently dramatic, and most voters grasped that bankers were overpaid. But a little more analysis is needed before sensible action can be taken.
Bank managements are not entirely stupid and had noticed that talented employees demanded big rewards, but that profits tended to be erratic. They soared and plunged erratically, so it made sense to pay most of the big rewards as bonuses. In a bad year bonuses could be drastically reduced, because there was no legal obligation to pay them.
Of course, bank bonuses were totally unlike bonuses in other sectors of the economy. Most employees do not get bonuses at all. Most of those who do get them get relatively small amounts, maybe a few hundred or at most a few thousand. But they read about individual bankers getting millions in the “bonus season”. So the conclusion was obvious: we must stop, or failing that curb, bankers’ bonuses.
I tentatively debated that with maybe half-a-dozen people, none of them stupid. None of them were interested in the idea that curbing bonuses would just increase bankers’ basic pay, which was a bad idea. Of course, that is what happened. HSBC led the way and increased basic salaries for its top few hundred bankers shortly after the cap came in.
In other words, there are two problems. One is that many people are both stupid and ill-informed, with little interest in becoming better informed. But the other, and more serious, problem is that most people are simply not interested in politics. The fact is that thinking is hard work. Most people prefer to stick to their existing opinions – however ill-supported by the facts, and however self-contradictory – rather than do the hard work of thinking about an issue.
People like me tend to find it bizarre that people do not enjoy thinking. I tend to spend most of my time analysing and re-analysing. I cast my net fairly wide. My core activity is probably thinking hard about maths and fundamental physics, but because I have always worked outside those areas, particularly in government and in finance, I also spend a fair amount of time thinking about politics and finance.
Well maybe not huge amounts. Physics, and indeed science generally, is particularly challenging, and hence exciting, because relatively small changes (in experimental data, for example) can ripple through to require huge changes in apparently well-established theories. Nothing is ever final in science. The best you can hope for is that a theory becomes firmly established in a limited domain. But the excitement of seeing the implications of apparently small changes rippling through makes it much more alluring that politics. It is also fascinating how resistant to the evidence the large majority of those whose lives are supposedly dedicated to the search for truth can be.
For example, Newtonian dynamics is well established for velocities much less than the velocity of light and distances much large than a nanometre, but arguably the most important development of the last thirty years is that it has become clear that there is an additional limitation on its validity. The Newtonian/Einstein equations for the gravitational force are probably totally wrong in the weak field domain, which applies once you move away from the solar system to galactic scales. Getting any significant number of the thousands of astrophysicists and string theorists to face up to that is another matter entirely. My general experience in science is that the more speculative the area, the more dogmatic the participants.
Given that people are extremely reluctant to think about political issues, words become extremely important. Often debates are won by capturing an idea in a single word or phrase. So Tony Blair’s genius on Iraq was to popularise the phrase “weapons of mass destruction”. That phrase conveyed that if we didn’t go to war against Saddam Hussein then Hiroshima would come to us. No further thought was needed. But where it happened, it was all about a preliminary issue (is Saddam really a threat to us) and not about the main issues: (1) granted there is a threat, is invasion the best way of dealing with it, and (2) granted an invasion, what happens afterwards.
That tale also illustrates how expertise and talent can always be used for good or ill. Unfortunately, in that case the outcome was tragic.
In the case of bonuses, it seems to have been accidental that policy got decided on the basis of a the wrong word (the real issue was bankers’ pay, not the proportion that was paid as a bonus). I remember at the time that the regulators seemed to have fairly mixed feelings about attacking bonuses. Of course, the attack was not wholly harmful. One reform was to delay payment of bonuses, so that there was more time to check that the rewarded actions and the institutions health were as rosy as they appeared at the end of the year. But it was hopeless for regulators to resist capping bonuses, not just because of UK opinion, but also because of the even stronger EU opinion. Eurocrats were not remotely deterred by the possible damage to the stability of London banks, indeed some of them no doubt saw anything which might reduce London’s dominance in EU financial services as a plus.
Anyway, it will be interesting to see if passions have yet cooled enough for this area to be revisited. Mark Garnier (the Tory MP for Wyre Forest, a rural constituency in Worcestershire, and member of the Treasury Select Committee) apparently told City AM recently that the bonus cap was imbecilic.
Andrew Bailey and Mark Carney (Bank of England) have both spoken out against it. Of course, the snag is that trying to limit bankers’ pay is likely to be even more controversial. My own recommendation would be sunlight: we should introduce a rule that the names and pay of all bank employees paid £1 million or more should be disclosed in the annual report. Even if the concept was accepted, there would be attempts to water it down and delay it with arguments about the detail, but the idea seems sound to me, and indeed should be applied to all employees. To stop avoidance you would probably also have to require a brief summary to be published of the tax return of anyone filing income of more than £1 million.