Bankers' pay is high because there's too much money in the finance sector

The EU's attempt to cap banker's bonuses trundles on. But it's misdirected, writes Alex Hern.

As predicted, George Osborne made a last-ditch attempt yesterday to prevent the EU's cap on banker's bonuses being institutedtelling the convention of finance ministers that he "cannot support the proposal on the table". Despite the suggestion from Germany of a minor tweak to the proposals, apparently to give Osborne the chance to claim he'd won concessions, the Chancellor continued with his opposition, and so Britain remains the only EU nation not in favour of the cap.

There is still some fine detail left to be negotiated over the next few weeks, so if Osborne doesn't want to make the politically significant choice of being explicitly out-voted by the EU for the first time on this issue he could change his stance; but, as the Guardian's Ian Traynor writes, "there was no doubt that the central decision, to clamp down on bonuses, was irreversible".

Now that victory is within their grasp, some in Europe are looking to the next battle. The Telegraph's Louise Armitstead and Bruno Waterfield report that Spain's finance minister, Luis de Guindos, is looking at applying the same rules to salaries overall:

“We are very much in favour of the limitation on variable remuneration but that’s not the only issue,” he said. “The question is also the entirety of remuneration, which is sometimes more important. And Spain’s position is that shareholders’ meetings must have a major involvement and should decide the overall remuneration of bankers.”

De Guindos' plan hints at the real aim of the bonus cap. As I wrote last week, there are a number of possible targets, and the cap is flawed at achieving any of them. It will do little to affect the balance of risk in the system; little to affect the overall remuneration of bankers; and, since bonuses are more of a historical artefact than a considered motivation to action, there's not really any reason to think that they actually have any effect from the start.

It's clear from de Guindos' words that at least some of the support for capping bonuses comes because it's seen as an easy way to reduce the pay of bankers; and that now that that's done, the salaries should be next in line.

But as the Guardian's Zoe Williams discovered, the money has to go somewhere. Tim Simons, "who works in operations for a government-owned investment bank", makes the point to her:

"When a bank makes money, it either pays to its employees; or it pays to its shareholders – the wealthy, I call them."
"But aren't the employees wealthy too?"
"No, traders aren't wealthy, they're just well-paid."

For similar reasons, I've heard bankers refer to their profession—with tongue firmly in cheek—as the ultimate victory of Marxism. It is, after all, an industry in which the workers have successfully captured nearly all the surplus value they create.

Simons seems correct that the trade-off the banks face is between handing money to employees or shareholders. Take this, from 2005 but still relevant:

During in the past four years, securities firms in the US paid $7bn more in bonuses than they made in profits, $3bn more in 2004 alone… And compensation stays high even when profits are down. When J.P. Morgan admitted to bad bets last month, it slashed its net income for the second quarter. But during the same period, it paid employees more than $4bn, as it has in each of the past four quarters. On average, shareholders got just one dollar $1 for every $4 paid to employees.

But what that highlights the real problem for people who feel that bankers' pay is inequitable, distortionary, or in some other way problematic: ultimately, the pay is just a symptom of the fact that banking is an extraordinarily profitable industry.

In the US, finance accounts for just 8 per cent of GDP, but almost 30 per cent of corporate profits:

Noah Smith, examining why that might be, suggests that banking as a sector has naturally enormous economies of scale, and very few diseconomies. Put them together, and the tendency toward monopoly in finance is even greater than it is in capitalism generally. And so banks gain monopoly (or, more accurately, oligopoly) status, and can extract monopoly profits.

That even fits with what Simons told Williams. His dichotomy— "money goes to the employees or the shareholders"—misses the fact that banks could use that money sloshing around to boost the amount they pay savers, lower the interest rate they charge on loans, or reduce the fees and charges they levy on customers. (That applies just as much to investment banking as conventional retail banking). In a competitive industry, that's what would happen; but finance isn't a competitive industry.

The vast sums of money floating around the system have to exit it somewhere. High pay—and high pay in the city particularly—has a corrosive effect on the nation, but to tackle it without addressing the anticompetitive nature of the finance sector overall is prescribing painkillers to heal a broken arm.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Paul McMillan
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"We're an easy target": how a Tory manifesto pledge will tear families apart

Under current rules, bringing your foreign spouse to the UK is a luxury reserved for those earning £18,600 a year or more. The Tories want to make it even more exclusive. 

Carolyn Matthew met her partner, George, in South Africa sixteen years ago. She settled down with him, had kids, and lived like a normal family until last year, when they made the fateful decision to move to her hometown in Scotland. Matthew, 55, had elderly parents, and after 30 years away from home she wanted to be close to them. 

But Carolyn nor George - despite consulting a South African immigration lawyer – did not anticipate one huge stumbling block. That is the rule, introduced in 2012, that a British citizen must earn £18,600 a year before a foreign spouse may join them in the UK. 

“It is very dispiriting,” Carolyn said to me on the telephone from Bo’ness, a small town on the Firth of Forth, near Falkirk. “In two weeks, George has got to go back to South Africa.” Carolyn, who worked in corporate complaints, has struggled to find the same kind of work in her hometown. Jobs at the biggest local employer tend to be minimum wage. George, on the other hand, is an engineer – yet cannot work because of his holiday visa. 

To its critics, the minimum income threshold seems nonsensical. It splits up families – including children from parents – and discriminates against those likely to earn lower wages, such as women, ethnic minorities and anyone living outside London and the South East. The Migration Observatory has calculated that roughly half Britain’s working population would not meet the requirement. 

Yet the Conservative party not only wishes to maintain the policy, but hike the threshold. The manifesto stated:  “We will increase the earnings thresholds for people wishing to sponsor migrants for family visas.” 

Initially, the threshold was justified as a means of preventing foreign spouses from relying on the state. But tellingly, the Tory manifesto pledge comes under the heading of “Controlling Immigration”. 

Carolyn points out that because George cannot work while he is visiting her, she must support the two of them for months at a time without turning to state aid. “I don’t claim benefits,” she told me. “That is the last thing I want to do.” If both of them could work “life would be easy”. She believes that if the minimum income threshold is raised any further "it is going to make it a nightmare for everyone".

Stuart McDonald, the SNP MP for Cumbernauld, Kilsyth and Kirkintilloch East, co-sponsored a Westminster Hall debate on the subject earlier this year. While the Tory manifesto pledge is vague, McDonald warns that one option is the highest income threshold suggested in 2012 - £25,700, or more than the median yearly wage in the East Midlands. 

He described the current scheme as “just about the most draconian family visa rules in the world”, and believes a hike could affect more than half of British citizens. 

"Theresa May is forcing people to choose between their families and their homes in the UK - a choice which most people will think utterly unfair and unacceptable,” he said.  

For those a pay rise away from the current threshold, a hike will be demoralising. For Paul McMillan, 25, it is a sign that it’s time to emigrate.

McMillan, a graduate, met his American girlfriend Megan while travelling in 2012 (the couple are pictured above). He could find a job that will allow him to meet the minimum income threshold – if he were not now studying for a medical degree.  Like Matthew, McMillan’s partner has no intention of claiming benefits – in fact, he expects her visa would specifically ban her from doing so. 

Fed up with the hostile attitude to immigrants, and confident of his options elsewhere, McMillan is already planning a career abroad. “I am going to take off in four years,” he told me. 

As for why the Tories want to raise the minimum income threshold, he thinks it’s obvious – to force down immigration numbers. “None of this is about the amount of money we need to earn,” he said. “We’re an easy target for the government.”

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

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