Don't be too hard on Osborne: the bonus cap is horribly flawed

What will happen to bankers pay? Very little. To their risk taking? Very little. To, basically, anything? You guessed it.

In opposing the EU's cap on bankers' bonuses, George Osborne isn't just giving nakedly preferential treatment to the city. The chancellor does have some strong arguments on his side as to why the cap is a bad idea.

To recap, late on Wednesday, the EU parliament secured agreement to impose a mandatory 1:1 ratio of salary relative to "variable pay". That ratio can rise to 2:1 with shareholder approval (subject to 50 per cent quorum), but no further. Britain still has the option of pushing the move to a vote, but that would cross a rubicon in UK-EU relations: in the past, Britain, commonly an outlier in matters of banking policy, has pushed negotiations to the brink of formal vote and then taken a few ceremonial trade-offs in return for its approval. That way, it can truthfully say it has never been overruled by the EU.

Not only would forcing a vote we would definitely lose play terribly politically — George Osborne making his biggest-ever stand in the EU over the right of bankers to be paid exorbitant sums — it would also be a gift to the anti-EU wing of the conservative party, of which Osborne is, thankfully, not a member.

But while he shouldn't force a vote, the Chancellor has good reasons for being wary of the policy. There are three big concerns, two of which are legitimate, and two of which are shared by the chancellor (although not the same two).

The first is that the policy will do nothing for equality. Despite the fact that the cap on bonuses is sometimes phrased as tackling "high pay", it will, in all likelihood, increase pay. As Deborah Hargreaves writes:

Already base salaries in the banking sector have been rising sharply as regulators try and choke off the multimillion-pound annual bonus awards. The EU's plan could lead to more pressure for a rise in fixed pay.

Banks have increased salaries across Europe by 37% in the past four years in response to a crackdown on bonuses and pressure from regulators to claw back some rewards if bets go wrong later on.

The reasoning is fairly obvious. If you cap bonuses at the same level as salaries, and put no limit on salaries, it's clear what's going to happen.

Of course, that's fairly unlikely to be a motivating factor in Osborne's reasoning. If there's one thing the Conservatives are comfortable with, it's people getting filthy rich (although they seem to quietly ignore the "as long as they pay their taxes" part of Peter Mandleson's famous phrase). But it's an important argument against the bonus cap overall.

Not such a strong argument is that banks might flee the EU to avoid it. There is certainly going to be some pressure, because the cap has overreached such that it also affects international operations of EU-based banks. The name being bandied around is Standard Chartered, the London-based firm that does most of its work in emerging markets (back in the news at the moment over it's £110,000 fine in Taiwan). But the cap can't be both easy-to-evade and a motivation to spend time and money moving headquarters, and all indications are that it's the former rather than the latter.

But the biggest problem with the bonus cap is that it won't do anything to address the most important reason for its introduction: tackling risk in the banking sector. The model Osborne and the UK proposed instead was likely to be better in that regard: "our" desired cap would only hit cash bonuses. That would provide an incentive on banks to award increasing chunks of their pay pool in the form of stock options and the like, which encourage bankers to act in the long-term interest of their company, not merely boost their returns for that year to enhance their bonus.

In fact, it's questionable whether bonuses even encourage must risk-taking at all. Crooked Timber's Dan Davies demonstrates that, assuming a bonus is linearly related to performance, the bulk of the bonus encourages very little risk taking at all. Employees have a motivation to take risks if their performance is poor enough that they would get no bonus, but once they have some bonus, every further risk they take is as likely to decrease their income as it is to increase it.

Maybe, as the Guardian suggests, the bonus cap was worth it just to make bankers publicly admit that their high pay has little to do with their actual ability. But for any genuine policy aims, it seems unlikely to be as successful as its promotors hope.

Photograph: Getty Images

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

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The most terrifying thing about Donald Trump's speech? What he didn't say

No politician uses official speeches to put across their most controversial ideas. But Donald Trump's are not hard to find. 

As Donald Trump took the podium on a cold Washington day to deliver his inauguration speech, the world held its breath. Viewers hunched over televisions or internet streaming services watched Trump mouth “thank you” to the camera, no doubt wondering how he could possibly live up to his deranged late-night Twitter persona. In newsrooms across America, reporters unsure when they might next get access to a president who seems to delight in denying them the right to ask questions got ready to parse his words for any clue as to what was to come. Some, deciding they couldn’t bear to watch, studiously busied themselves with other things.

But when the moment came, Trump’s speech was uncharacteristically professional – at least compared to his previous performances. The fractured, repetitive grammar that marks many of his off-the-cuff statements was missing, and so, too, were most of his most controversial policy ideas.

Trump told the crowd that his presidency would “determine the course of America, and the world, for many, many years to come” before expressing his gratefulness to President Barack Obama and Michelle Obama for their “gracious aid” during the transition. “They have been magnificent," Trump said, before leading applause of thanks from the crowd.

If this opening was innocent enough, however, it all changed in the next breath. The new president moved quickly to the “historic movement”, “the likes of which the world has never seen before”, that elected him President. Following the small-state rhetoric of his campaign, Trump promised to take power from the “establishment” and restore it to the American people. “This moment," he told them, “Is your moment. It belongs to you.”

A good deal of the speech was given over to re-iterating his nationalist positions while also making repeated references to the key issues – “Islamic terrorism” and families – that remain points of commonality within the fractured Republican GOP.

The loss of business to overseas producers was blamed for “destroying our jobs”. “Protection," Trump said, “Will lead to great strength." He promised to end what he called the “American carnage” caused by drugs and crime.

“From this day forward," Trump said, “It’s going to be only America first."

There was plenty in the speech, then, that should worry viewers, particularly if you read Trump’s promises to make America “unstoppable” so it can “win” again in light of his recent tweets about China

But it was the things Trump didn't mention that should worry us most. Trump, we know, doesn’t use official channels to communicate his most troubling ideas. From bizarre television interviews to his upsetting and offensive rallies and, of course, the infamous tweets, the new President is inclined to fling his thoughts into the world as and when he sees fit, not on the occasions when he’s required to address the nation (see, also, his anodyne acceptance speech).

It’s important to remember that Trump’s administration wins when it makes itself seem as innocent as possible. During the speech, I was reminded of my colleague Helen Lewis’ recent thoughts on the “gaslighter-in-chief”, reflecting on Trump’s lying claim that he never mocked a disabled reporter. “Now we can see," she wrote, “A false narrative being built in real time, tweet by tweet."

Saying things that are untrue isn’t the only way of lying – it is also possible to lie by omission.

There has been much discussion as to whether Trump will soften after he becomes president. All the things this speech did not mention were designed to keep us guessing about many of the President’s most controversial promises.

Trump did not mention his proposed ban on Muslims entering the US, nor the wall he insists he will erect between America and Mexico (which he maintains the latter will pay for). He maintained a polite coolness towards the former President and avoiding any discussion of alleged cuts to anti-domestic violence programs and abortion regulations. Why? Trump wanted to leave viewers unsure as to whether he actually intends to carry through on his election rhetoric.

To understand what Trump is capable of, therefore, it is best not to look to his speeches on a global stage, but to the promises he makes to his allies. So when the President’s personal website still insists he will build a wall, end catch-and-release, suspend immigration from “terror-prone regions” “where adequate screening cannot occur”; when, despite saying he understands only 3 per cent of Planned Parenthood services relate to abortion and that “millions” of women are helped by their cancer screening, he plans to defund Planned Parenthood; when the president says he will remove gun-free zones around schools “on his first day” - believe him.  

Stephanie Boland is digital assistant at the New Statesman. She tweets at @stephanieboland