But here’s the thing: for the sheer logic of the matter, the chancellor has a point. The design of the European Union’s bonus cap has always been clumsy and there is no evidence that it has reduced banks’ risk-taking, which should have been the aim. The problem, as reiterated here at the time, is that the “waterbed principle” applies: push down on one pay sector and another goes up. The cap, crucially, placed no limits on how much a bank could pay an individual. Instead, it limits the bonus portion to twice the employee’s salary. So the banks – shamelessly but predictably – increased fixed income. In 2014, the chief executives of Barclays and Lloyds Banking Group were given £1m pay rises disguised as ‘bonuses’. At HSBC, the boss’ fixed pay – the minimum he would earn – rose from £2.5m to £4.2m. Similar maneuvers have occurred though pay structures lower the organizations. As UK regulators worried at the time, the cap had the perverse potential to make banks less flexible in a crisis. Their fixed costs increased, limiting their margin to preserve capital by reducing variable distributions if required to do so. “Once you give out more fixed pay, you can’t get it back,” said Andrew Bailey, then head of the Bank of England’s Prudential Regulation Authority and now its governor. “What we’ve been pushing for is for banks to use shares or other non-cash bonuses that can be returned if something goes wrong.” Fortunately, regulators also took these clawback measures. If reckless risk-taking or rule-breaking has been reduced (a disputed claim), it has been through malus clauses and the like, as well as tighter capital allocation rules that have made certain activities not worth pursuing. The bonus limit was random. So, okay, scrap it. it doesn’t really matter. In any case, the total remuneration for investment bankers in London is effectively determined by interest rates in New York. But here’s the second point: other elements of Kwarteng’s bank deregulation package will certainly matter. Under the banner of making the city more competitive, we may find ourselves ready with proposals covering everything from solvency ratios to capital location regulations to trading book rules. Some of the changes he proposes may be simple technical tweaks, but some may represent a step back towards the “light touch” era that led to the 2008-09 crash. We await details, but one fears that the politically toxic, but mostly irrelevant, bonus cap will get 90% of the attention. The dangerous stuff – possibly – will be in the boring but very important 10%.
Christmas cheer can be in short supply at John Lewis
Sharon White: “A successful Christmas is key to business given the first half.” Photo: Terry Murden/Alamy Still with bonuses, John Lewis Partnership staff should not get their hopes up. “A substantial boost” in the group’s performance “beyond what we usually achieve in the second half” would be needed to afford a bonus this year, the chairman, Sharon White, said as the first-half loss widened to £99m. This wording seems more carefully constructed than the usual exercise in managing expectations. One can see why: department stores produced solid operating performance, but Waitrose-like sales fell 5%. Part of the latter was simply to ease the Covid factors, but the chain also needs to sharpen prices for consumers. It’s hard to pin down the reasons why Christmas would be so much better than usual. In these circumstances, a direct lump sum cost of living payment of £500 for staff is the right approach for an employee-owned business.
Will Shell’s new chief live up to his predecessor’s climate commitment?
A good point from Follow This, the Dutch shareholder activist group: Ben van Beurden, who stepped down as CEO of Shell at the end of this year, has been in the job for nine years. So if Wael Sawan, the new boss, survives that long, he will still be there when the company needs to hit a tough climate target. Shell’s big-picture goal is net zero by 2050, but the interim sees absolute emissions cut by 50% by 2030, compared to 2016 levels. Sawan may therefore be the first head of “ big oil’ in the position of having to personally deliver on his predecessor’s climate pledge. Deadline pressure can be helpful (hopefully).
