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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Here’s everything wrong with Daniel Hannan’s tweet about Saturday’s Unite for Europe march

I am Captain Ahab, and Dan is my great white whale, enraging and mocking me in equal measure through his continued political survival.

I was going to give up the Daniel Hannan thing, I really was. He’s never responded to this column, despite definitely being aware of it. The chances of him changing his views in response to verifiable facts seem to be nil, so the odds of him doing it because some smug lefty keeps mocking him on the internet must be into negative numbers.

And three different people now have told me that they were blissfully unaware of Hannan's existence until I kept going on about him. Doing Dan’s PR for him was never really the point of the exercise – so I was going to quietly abandon the field, leave Hannan to his delusion that the disasters ahead are entirely the fault of the people who always said Brexit would be a disaster, and get back to my busy schedule of crippling existential terror.

Told you he was aware of it.

Except then he does something so infuriating that I lose an entire weekend to cataloguing the many ways how. I just can’t bring myself to let it go: I am Captain Ahab, and Dan is my great white whale, enraging and mocking me in equal measure through his continued political survival.

I never quite finished that book, but I’m sure it all worked out fine for Ahab, so we might as well get on with it*. Here’s what’s annoying me this week:

And here are some of the many ways in which I’m finding it obnoxious.

1. It only counts as libel if it’s untrue.

2. This sign is not untrue.

3. The idea that “liars, buffoons and swivel-eyed loons” are now in control of the country is not only not untrue, it’s not even controversial.

4. The leaders of the Leave campaign, who now dominate our politics, are 70 per cent water and 30 per cent lies.

5. For starters, they told everyone that, by leaving the EU, Britain could save £350m a week which we could then spend on the NHS. This, it turned out, was a lie.

6. They said Turkey was about to join the EU. This was a lie too.

7. A variety of Leave campaigners spent recent years saying that our place in the single market was safe. Which it turned out was... oh, you guessed.

8. As to buffoons, well, there’s Brexit secretary David Davis, for one, who goes around cheerfully admitting to Select Committees that the government has no idea what Brexit would actually do to the economy.

9. There was also his 2005 leadership campaign, in which he got a variety of Tory women to wear tight t-shirts with (I’m sorry) “It’s DD for me” written across the chest.

10. Foreign secretary Boris Johnson, meanwhile, is definitely a liar AND a buffoon.

11. I mean, you don’t even need me to present any evidence of that one, do you? You just nodded automatically.

12. You probably got there before me, even. For what it's worth, he was sacked from The Times for making up a quote, and sacked from the shadow frontbench for hiding an affair.

13. Then there’s Liam Fox, who is Liam Fox.

14. I’m not going to identify any “swivel-eyed loons”, because mocking someone’s physical attributes is mean and also because I don’t want to get sued, but let’s not pretend Leave campaigners who fit the bill would be hard to find.

15. Has anyone ever managed to read a tweet by Hannan beginning with the words “a reminder” without getting an overwhelming urge to do unspeakable things to an inanimate object, just to get rid of their rage?

16. Even if the accusation made in that picture was untrue, which it isn’t, it wouldn’t count as libel. It’s not possible to libel 52 per cent of the electorate unless they form a distinct legal entity. Which they don’t.

17. Also, at risk of coming over a bit AC Grayling, “52 per cent of those who voted” is not the same as “most Britons”. I don’t think that means we can dismiss the referendum result, but those phrases mean two different things.

18. As ever, though, the most infuriating thing Hannan’s done here is a cheap rhetorical sleight of hand. The sign isn’t talking about the entire chunk of the electorate who voted for Brexit: it’s clearly talking specifically about the nation’s leaders. He’s conflated the two and assumed we won’t notice.

19. It’s as if you told someone they were shit at their job, and they responded, “How dare you attack my mother!”

20. Love the way Hannan is so outraged that anyone might conflate an entire half of the population with an “out of touch elite”, something that literally no Leave campaigners have ever, ever done.

21. Does he really not know that he’s done this? Or is he just pretending, so as to give him another excuse to imply that all opposition to his ideas is illegitimate?

22. Once again, I come back to my eternal question about Hannan: does he know he’s getting this stuff wrong, or is he genuinely this dim?

23. Will I ever be able to stop wasting my life analysing the intellectual sewage this infuriating man keeps pouring down the internet?

*Related: the collected Hannan Fodder is now about the same wordcount as Moby Dick.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Daniel Hannan. You can find him on Twitter or Facebook.