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  1. Business
  2. Economics
10 January 2011

The government prepares to “stand idly by” on bankers’ bonuses

Nick Clegg waters down his rhetoric and gives no indication of measures to enforce restraint in payo

By Samira Shackle

On Radio 4’s Today programme this morning, Nick Clegg appeared to confirm speculation that the government is backing away a big confrontation with the banks over excessive bonuses – if only through his reticence.

Let’s just recap. A month ago, the Deputy Prime Minister was full of fiery rhetoric, telling the Financial Times:

The banks should not be under any illusion, this government cannot stand idly by.

They don’t operate in a social vacuum. It is wholly untenable to have millions of people making sacrifices in their living standards, only to see the banks getting away scot-free.

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Yet today, this was substantially watered down:

I totally accept that the kind of sky-high numbers bandied about in the City of London sound like they come from a parallel universe to most people. State-owned banks have to be sensitive. The British public are the shareholders of those state-owned banks. We are entitled to say – as the government has – that they must be sensitive.

Asked by the show host James Naughtie what action the government would take to force the banks to listen, Clegg refused to give any solid answer, simply saying “they have to listen to us because they’re state-owned”.

Lest we forget, the coalition agreement pledged “detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector”. But in a marked contrast to his words in December, Clegg appeared to deny – or lay the ground for denying – the need for further action:

We’re in discussion with the banks, and we’ve already done a great deal as far as the banking system is involved . . .

It’s worth remembering that new rules have already dramatically changed the way bonuses are structured.

The new rules that he is referring to are reforms from the EU and the Financial Services Authority, meaning that at least half of bonuses now have to be paid in shares, and between 40 per cent and 60 per cent cannot be cashed in for several years.

But the idea that making employees into shareholders will reduce their risk-taking behaviour is misguided. Lehman Brothers is a case in point – employees there were large shareholders, but that did not stop them from hastening its collapse. Moreover, even if the gratification is delayed, it still exists. Shares can be cashed in eventually, and the incentive for irresponsible risk remains.

Even if the bonus pool is smaller than last year’s, the sums involved will still feel like an insult to ordinary people bracing themselves for the full pain of the government’s austerity programme.

Clegg may still feel a personal distaste for large bonuses, but his words today indicate that “standing idly by” is precisely what the government will be doing.

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