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Stephen  Bevan

Perverse Consequences of the EU Bonus ‘Cap’?

Authors: Stephen Bevan Professor Stephen Bevan

26 September 2013

The news yesterday (25 September) that the Treasury is challenging an EU proposal to cap bonuses in the City has provoked understandable indignation from those campaigning to curb so-called ‘Fat Cat Pay’. There remains a good deal of public anger that executive remuneration remains disconnected from the pay of ordinary mortals where we have seen a decline in real wages and a fall in living standards. This has led to a climate where punitive measures to reduce the size of bonuses are widely supported.

Of course, the problem comes when we have to find mechanisms which have the desired effect rather than relying on tokenism. My view is that the Treasury is correct to point out some of the flaws in the EU proposals, but could do much more to strengthen transparency and restraint in the UK.

The fundamental problem with the EU proposal to cap bonuses to 100% of base pay is that it is vulnerable to manipulation which, if anything, will ultimately make the situation worse. I know several large companies which getting ready to introduce significant increases to the basic pay of senior staff so that their total earnings – including bonuses up to the ‘cap’ – will remain high and competitive. Forcing firms to ‘game’ the new rules will have the perverse consequence of reducing the proportion of total earnings ‘at risk’ for these executives. This means that much less of their total pay is ‘contingent’ on performance and much more of it is earned regardless of how well they do. At a time when we have seen some (albeit slow) progress towards longer-term and deferred bonuses, it would be a retrograde step to soften the incentive to deliver results and sustained business success.

The problem the Treasury has is that it looks like it is trying to protect excessive and unpopular bankers’ bonuses, even though their concerns about the EU cap are mostly legitimate. So, the challenge for the government is to come up with proposals which have teeth but don’t encourage city firms and banks to invent ingenious ways of getting around the rules.

On 18th November, The Work Foundation will be hosting an event at which Rt Hon Vince Cable, Secretary of State for Business, Innovation and Skills, will be debating the challenges of executive pay with, among others, Deborah Hargreaves of the High Pay Centre, and myself. If you can’t get to the event itself, it will be broadcast live as a webinar.

One of the themes of the debate is sure to be corporate governance. The role of remuneration committees, of non-executive directors and HR professionals – especially in the light of recent revelations about pay-offs at the BBC – remain under heavy scrutiny. I think that many in the HR profession still have serious questions to answer about their role in setting executive pay and bonuses. Does the fact that HR appears to have had almost no moderating influence over the worst excesses of exec pay mean that, as a profession it was a) asleep on the job or b) complicit in back-scratching of outrageous proportions?

As the debate on executive remuneration continues, I think the profession has to be the ‘moral compass’ of business and to stand up for transparency and restraint at a time when public consent for excess is non-existent.