OK, OK, so great, we all see that huge bonuses mean that people will take higher risks and that perhaps we don\’t particularly want people to take such risks.
But the problem with this article, as with every other one on the same subject, is that no one ever says what the solution is.
It could in fact be that there is no legislative solution….at least, not one that is not worse than the current perceived problem.
We can\’t simply ban bonus payments, that\’s a gross interference with the basic freedom to set up a contract however you wish.
Other than that, what actually could be done?
Not a lot, eh?
It’s simple.
The people who lose most from silly bonus payments are shareholders. As long as we have a daft system whereby you are at a disadvantage from owning shares directly and get tax breaks if you own them via a pension fund/unit trust, then people will do the latter (hence the decline in small shareholders and the rise in the % of quoted shares that are owned by ‘institutions’).
These institutions are in cahoots with Big Management at UK plc and together they rip off the little guys and nod each others’ salary packages through.
Ergo, the solution is to reduce tax breaks for pensions and at the same time reduce tax burden on direct share ownership (get rid of Stamp Duty, CGT and higher rate tax on dividends, for example) and there’ll be a lot more small shareholders kicking up a stink at AGMs and refusing to approve directors’ salary packages.
That’s that fixed. Next.
“We can’t simply ban bonus payments, that’s a gross interference with the basic freedom to set up a contract however you wish.”
Eh? You say the words “can’t” and “gross interference” in the same sentence. Where have you been for the last ten years?
Isn’t it gross interference to be told you need to pay for an inspector to visit if you replace your windows? Isn’t it gross interference to be told how much salt you may eat? Isn’t it gross interference to be told the minimum hourly rate for which you may work? Isn’t it gross interference to be told you must have a HIP before you can market your house? Isn’t it gross interference to be sent to jail for playing a guitar in a pub without a licence?
Gross interference is precisely what the EU and Labour do. It’s their default mode. In fact, I’m expecting some silly piece of legislation in the same vein as price and wage controls from the 1970s.
“Ergo, the solution is to reduce tax breaks for pensions”
Those tax breaks are there to provide incentives to save and so avoid the welfare system in retirement. Which would be radically undermined by your proposal.
A better approach would be stronger shareholder powers. Nominee-held stocks ought to be able to be voted by the beneficial owners, and trivially so (e.g. via the web).
“I wouldn’t put it past Labour to put in new taxes on bonuses.”
It’s probably too late for a windfall tax on bonuses, but I bet that the upper earnings threshold for NI gets removed as a “tax on rich bankers”.
tax breaks are there to provide incentives to save and so avoid the welfare system in retirement. Which would be radically undermined by your proposal
Excellent. The provision of incentives has outlived its usefulness in that particular regard – it’s led to gross distortions and social division.
Incentives such as tax relief on contributions – if not done away with altogether – should be limited to the basic rate of tax. It’s absurd that high rate taxpayers’ pensions are subsidised by the low-paid. I’d go a good deal further and suggest that any employer pension scheme should be a taxable benefit – and more, that any scheme providing a final-salary-linked pension, or an index-linked one, should be taxed doubly, since the taxpayer is providing the moolah to subsidise them.
Release employers from provision of pension schemes, and have them pay their employees the extra. Introduce the citizen’s pension and let everyone make the decision as to whether they can live on £115 or £125 or £135 a week (or whatever the figure is at the moment). If they can, great; if not, let them keep anything they can save, with the final pension / cash drawn being tax-free.
Easy. Distortion-less incentives, and freedom to choose. And employers no longer picking up the admin costs, and half the HMRC freed to be, ah, more productive. Somewhere else, preferably.
No matter how bureacratic any law on bonuses me be, the whizz kids will find a way round it.
What needs to happen is that when things go wrong management feels the pain very quickly and severly. This will will concentrate their minds.
So how to do that? Removing a lot of their liability risk protection of being limited companies might be a start.
there’ll be a lot more small shareholders kicking up a stink at AGMs and refusing to approve directors’ salary packages.
What he said! We need a lot more middle-class eccentrics *who care* at AGMs – like the one who used to go the M&S AGMs and crucify Greenbury about the drab clothes and Bridget Jones knickers.
Former Tory, the fiscally neutral Citizen’s Pension would be about £130 a week. Your other suggestions possibly go a bit further than what I was suggesting, but well said nonetheless.
Kay Tie – the annual cost of tax breaks for pensions are MORE than the total cost of the Basic State Pension. In terms of ‘alleviating poverty’ the latter is far more efficient. Once the taxpayer has chipped in to ‘alleviate poverty’ it should be every man for himself.
Direct share ownership is a much simpler and better than being able to vote by proxy.
the annual cost of tax breaks for pensions are MORE than the total cost of the Basic State Pension
The lack of a tax is not a cost to the treasury.
Serf, for sure, but for a given level of gummint spending (which is far too high, different topic), a tax break or a subsidy for one man (in this case pension funds) means a higher tax burden on another (in this case people who own shares directly).
All I am saying is that it would be better all round if people owned shares directly and that the tax system should not encourage them to do the opposite.
I wouldn’t put it past Labour to put in new taxes on bonuses.
http://lettersfromatory.wordpress.com
Its not the high bonuses that make people uneasy, its the perception that they are the result of not producing any goods or providing any services. So it’s bonuses in the City and “financial services” that stick in people’s craw for being so tenuously linked to any general benefit. A footballer like Frank Lampard is paid a very great deal , but was ,until about last week, heartily booed by England supporters for not producing performances remotely equal to the differential in pay with his opponents,who despite being paid a fraction of his wages, kept him very quiet.The comparative privacy of City jobs is seen as suspicious,now that a lot of banks are seen as running on empty,kept afloat by “confidence” with the emphasis on the first three letters.
The answer is the very great diminution of the importance of financial services to the economy (presently 30%?) and their employees’ redeployment in more tangible industries: not a Cambodian Year Zero scenario where they get sent to work in the fields, though this has its appeal,but the natural consequence of their own actions in screwing up the capitalist system.
“Direct share ownership is a much simpler and better than being able to vote by proxy.”
All very well in theory, but direct ownership and the ability to trade online are almost mutually exclusive at the moment (you have to become a sponsored member of the stock exchange to avoid nominee accounts).
I completely share (!) your position, and wanted direct stock ownership, but there is just no way to get it at a reasonable price. I want to vote my stock in my ISA, my stock in my dealing account, my stock in my SIPP. I would routinely lend the vote to activist shareholder groups if I could.
That’s where some Government regulation could be useful: give me back my voting rights without turfing me back to the 1920s with paper certificates.
“being so tenuously linked to any general benefit”
It’s only tenuous because people don’t understand it. No doubt there would similarly be general annoyance at large bonuses paid for discovering the Higgs Boson.
Democracy may be the least worst system for choosing the Government, but it’s just about the worst system for deciding how individuals should be treated. Or do you think that callers to Jeremy Vine should decide your salary?
Kay Tie, why ‘more regulation’? The right to appoint a proxy is in s372 Companies Act 1985.
There’s nothing to stop banks and other nominees from stealing a march on their rivals by offering a ‘you can appoint a proxy’ option to their online or other low-cost dealing service.
They don’t do this because the banks are in cahoots with the pension funds, but no doubt one day somebody (the chap from Ryanair?) will set up such a service and he will corner the market.
See also ‘Calpers’.
Mark, your first comment here seems to agree with the views of John Bogle, at least in identifying the problem of huge bonuses. We have moved from owners’ capitalism to managers’ capitalism.
http://www.vanguard.com/bogle_site/sp20030224.html
It seems quite easy to me.
The bonus is based on growth over the short term. Sales in the quater etc.
If the bonus was based on the actual growth of the fund over the period, then it would actually mirror the work done.
It would mean that there would have to be a transition time when bonus are not following the same rules the traders are used to – but in the long term, the result would be a bank that had no incentive to hide the figures – making it more stable, traders who work for the long term and so responsible for their own action – and shareholders who actually make real money!
Can you see them doing it? Of course not – its just too risky to actually worth with the truth!
“The right to appoint a proxy is in s372 Companies Act 1985.”
Not for beneficiaries of nominee holdings there isn’t. The 2006 Act gave some limited rights to nominees (receipt of information, for example), and nominees are now empowered to vote according to the wishes of the beneficiaries, but it’s not mandatory to accept instructions.
As I said before, direct stockholding without paper certificates is damned difficult. If shareholders are to exercise their powers (and if this is to be a remedy for mismanagement) then something had better get sorted out.
I’d rather shareholders got the power to kick management up the chuff than some New Labour committee weasel.
Kay Tie: “it’s not mandatory to accept instructions”.
OK, let’s change that rule to “it is mandatory to accept instructions” and Bob’s your uncle!
Will even the most independent-minded shareholder query the senior managers’ pay( or the bonus culture )when a business is making money hand over fist ?… I thought not.
And,conversely, the managers are less likely to try it on when the business is on its uppers.
The small shareholders are often the most guity of short-termism: the first to grab at a takeover bid if it means a quick paper profit and to hell with long-established businesses.
Although I grew disillusioned with anarcho-syndicalism and came to accept that capitalism is the only system we are likely to be allowed ,so it may as well be made to work, ( a view not shared by public-school educated right wingers in this country who are vandalising it with Bullingdon Club abandon) the process of moving away from the Far Left has left one ( I am lying) unanswered question : what it is the point of the Stock Market?Would n’t it be easier to raise capital through the banks and not distribute voting rights in your company to a bunch of footloose strangers through the mediation of this strange institution?
Perhaps now is not the time and place to ask, but
I simply can’t see the point of it, all political prejudices laid aside.
DBCR: The small shareholders are often the most guity of short-termism: the first to grab at a takeover bid if it means a quick paper profit
There are (as always) two sides to this.
When A plc launches a takeover bid for B plc, the first thing that happens is that A plc shares fall in value (because macho management is always prepared to overpay in order to enlarge its own empire, even if this is at the cost of its own shareholders) and B plc shares rise (takeover premium etc).
B plc’s directors then encourage B plc’s shareholders to reject the bid in order to haggle out a better offer for B plc shares (and better Golden Goodbyes for themselves). Whether the deal goes ahead or not, the investment banks, merchant banks, accountants, lawyers and all the rest earn themselves silly.
Not good.
Again, the answer is simple.
All it requires is a simple tweak to the Companies Act that instead of just B plc’s shareholders being asked to vote to accept the bid, a takeover should be made conditional on A plc’s shareholders approving it as well.
This is not a new idea, and no doubt Kay Tie would know whether this is envisaged in the 2006 Companies Act (not yet in force) or in the LSE’s Yellow Book.
NB, the point of the Stock Market is to allow people to invest their savings and diversify their investments. It is a purely private arrangement which came into existence all by itself and nobody is forced to participate if they don’t want to. I, for example, think it is a huge great scam and have never owned shares in anybody. Cash, currencies and property is my thing.
@mark wadsworth
Many thanks for your customary courtesy and clarity in dealing with my question.
I am not reassured by your feeling that shareholding is a ” huge great scam”: not something that a leftie who’s ( increasingly half-heartedly) trying to go straight needs to hear, particularly when McCain is now siding with the workers.
My only detailed knowledge of take-overs is of those in Northampton ,where I live, by Charles Clore in the 50’s.Clore seems to have been a dark genius who invented the predatory take-over and sell and lease back.But as far as I know ,he operated on the basis of private equity, which would tend to be resistant to the good effects of your reformed system.Then again private equity is not something you hear
much about post credit crunch.
DBCR, to clarify, I think that large companies being owned by lots of little investors is a great idea.
It’s just that all these ‘institutions’, the boards of directors and the tax system have made a mockery of it and are scamming us.
As you say, now the credit bubble has burst, private equity has faded from view.
Many of the bonuses in question are not really CEOs or board level, but trader and desk heads. These guys are motivated by greed, but this means they are very easy to manage, as are most salespeople.
Set the right objectives pinned to a pile of cash and they will go for it. The error is in the structure of the commission and bonus schemes, not bonuses per se.
Of course, this is not what people want to hear, for what is reason and truth doing in the way of a bit of envy politics?
It is not regulation but transparency and accountability that will help. Oh, and a major market correction. One down, two to go.
For me, the issue is that if your bonus is in cash, based on short-term performance, your incentive is to trade off the future for the sake of this year’s earnings. The solution is to pay bonuses in shares, held in trust for five or ten years, so that the incentive is to enhance long-term performance. The puzzle is why this is not already the norm.
@ Steve – this was the practice at Bear Stearns and Lehmans. It doesn’t appear to have done all that much goood…
On private equity – while the megadeals like Sainsbury’s and Chrysler aren’t hitting the headlines any more, you’d be surprised at the extent to which PE continues to buy into companies at SME and mid-tier level.