There is a proposal to cap any bonuses paid by EU based banks next year to senior executives. This bonus cap will apply to EU based banks worldwide, and for any non-EU based banks to all their offices within the EU. Bonuses will be limited to the annual salary amount or to double the salary figure if shareholders agree.
In a report in today’s FT, (US banks put City on bonus cap watch, 2 April) it is reported that some US banks and institutions are considering moving their Europe, Middle East and Africa operations outside of the EU from London to Dubai or similar cities to be outside of the reach of the new bonus cap law. No-one is quoted, but JPMorgan, Goldman Sachs, Bank of America and Citigroup all get a mention as big employers in the City of London.
The UK chancellor George Osbourne is lobbying Brussels to exempt these US companies from the EU bonus limit. However, it might be worth looking at this in the cold light of day to ask the economic question whether such a bonus cap exemption would be good or bad for the UK?
On the one side we are told that these US banks and financial institutions are big employers in the City of London and that there would be fewer UK jobs if these firms relocated to the Middle East or South Africa to run their European operations from a distance.
But perhaps there is another argument, that excessive bonuses are bad for the UK because they distort the economy. These bonuses, and their associated very high senior salaries, have grown massively in the last 20 years in central London to the extent that they now distort the national economy and hold back sustainable growth. The relatively small number of very high net worth individuals in central London has distorted the property market as well as the retail and hospitality sectors. These distortions cause micro local benefits (“few winners”) but macro dis-benefits to the rest of the UK (“many losers”) in terms of inefficient use of resources due to significant and unsustainable overheating. Further, these extreme income inequalities of themselves can cause bad social and economic outcomes, as argued in the book The Spirit Level by Richard Wilkinson and Kate Pickett in 2009. Finally, is it a credible business proposition that tens of thousands of loyal staff and their families would be relocated to Dubai so that a few senior executives could get to keep their extreme bonuses, and all done with no adverse effect on these businesses when they have to start making investment decisions about people, organisations and places that are now four thousand miles away.
If we are serious about rebalancing the UK economy then the greed of a few must be limited to protect the jobs of the many.