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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Corbynism isn’t a social movement and Labour shouldn’t be one

The leader's supporters have confused party with movement and party with public. 

The second Labour leadership contest in 12 months is at its heart a clash of mandates. Jeremy Corbyn and his supporters justify his leadership with repeated reference to "grassroots democracy" and his backing among members, whether in votes, polls or turnout at meetings. The Parliamentary Labour Party (PLP) majority justify their disengagement from the leadership by highlighting their relationship with the electorate: the programme they were elected on, Corbyn's record unpopularity and the extreme unlikelihood of winning a general election under his leadership.

However, the moral legitimacy and strategic orientation underpinning Corbynite claims derives in large part from the notion that they are a "social movement" that reaches beyond parliament. To an extent, this is mirrored by some in the PLP, who differentiate themselves by reference to exclusively or primarily being a parliamentary party.

The problem is that Corbynism is not a social movement and neither wing adequately understands the relationship between parties and movements. The coordinated action of "people all round the country" does not necessarily make something a movement. Existing explanations of social movements (ecological, labour, feminist, LGBT etc) tend to emphasise broad-based and diverse coalitions of activists focused largely on social transformation goals in civil society and only then directed towards state actors/actions. As Matt Bolton notes, "The relation between activist groups and the state is not mediated by any electoral mechanism". Most movements are long-term in character, though others may be more ephemeral such as Occupy.

In contrast, statements from the Corbyn leadership and from Momentum emphasise more limited party and state-directed goals. These primarily focus on building a mass party and holding parliamentary representatives to account. Labour now has a mass membership, but is no more a mass party than when there was a similar expanded membership in the early Blair years.

A mass party brings together members and activists with deep roots in communities and movements that enable it to understand social conditions and changes. That degree of embeddedness may allow the party to build electoral blocs that articulate and aggregate interests and identities in a governing project that can win and then exercise power. That is different from the dominant conceptions of both sides in the clash of mandates debate. Most of the PLP majority come from a tradition where the party is little more than an electoral machine, where members have occasional walk-on parts and where the public is seen mainly through the prism of focus groups and mass media. The result is a hollowed out and professionalised politics without a transformative agenda that reinforces the roader crisis of representation.

In contrast, Corbynism conflates and confuses the functions of party and movements. The former becomes the"‘voice" of the latter – a kind of social movement aggregator and/or megaphone for any group "in struggle". But this fails to understand the complex nature of building a popular coalition, where those interests and identities may diverge and even clash sharply. Furthermore, the vast majority of voters are not active in parties or social movements and their views will be unlikely to be heard on the picket line or party rally. Democratic (as distinct from vanguardist) parties have to engage in trade-offs, identification of priorities and tactical manoeuvers that are a sharp contrast to ‘"support anyone/all demands in struggle". Even genuine insurgent parties such as Podemos and Syriza, with roots in movements, inevitably struggle to manage these tensions when faced with the prospect or practice of governing.

The Corbynite confusion is not new. We saw it at the height of the Bennite wave in the 1980s and particularly in Ken Livingstone’s vision of Labour as a rainbow coalition. Here, a prospective electoral coalition was envisaged from combining the demands of various movements, filtered through their supposed organisational expression in black sections, women's sections and so on. In practice, activist voices tend to substitute for the actual experiences and concerns of the various groups. This kind of vanguardist politics takes a different form today, partly as result of changed social and political conditions, but also because of the changing means of communication and organising.

Rather than a social movement, Corbynism should be understood as a network, with a variety of horizontal and vertical characteristics. The former consists of a large and loose association of supporters who function largely as an army of clickivists who aggressively defend the goals of the project and the authenticity of the leader, while consigning those who dissent to some beyond the pale category (Blairite, Red Tory, traitor etc). Abuse is not an inherent feature of those attacks, but the ideological and personality-driven character of the project tends to encourage it. Indeed, the leader-focused nature of Corbynism "testifies precisely to the lack, the weakness, of the "social movement" of which he is the supposed avatar".

The speed and reach of such forms of networking are facilitated by the growth of social media. Such efforts have been conceptualised and popularised by Paul Mason, who has transferred his belief that the agency of social change in a "postcapitalist" world is the ‘educated networked individual’ to the distinctive nature of Corbyn party/movement hybrid. Something different is clearly happening with such networking, but as has been widely observed, the effectiveness of horizontal organising to effect lasting political change has been exaggerated and the tendency to act as self-referential cultural echo chambers vastly under-estimated.

As for the vertical, this is represented by the core team around the offices of Corbyn and John McDonnell and through the factional organisation of Momentum. Their focus is party building, albeit dressed up in the language of social movement. Circumstances have combined to offer the hard left a unique opportunity to capture a social democratic party machine. There is a genuine though mistaken belief that institutional capture will lead to a broader institutional transformation. This does not mean that Momentum should be characterised as a "mob" or a plaything of Trot entrists. Momentum brings together a large number of committed activists understandably fed up with the narrow and timid nature of Labour in particular and politics in general. Some of their party building can help revitalise Labour at local level, though at the moment there is little evidence of substantive participation in campaigns on the ground.

In a recent Guardian piece, Ellie Mae O’Hagan takes critics of Corbynism to task: "There are not enough delusional Leninists in Britain to make up the entirety of Corbyn’s support – these are only ordinary British voters who want radical solutions to a growing number of crises". The first observation is certainly true, but the second is deeply misguided, though all-too typical. As the MP Richard Burden aptly notes, "We stop thinking about how we connect with 'the people' and start to think of ourselves as 'the people'. And as we do that, we get into the politics of the echo chamber where the voices we hear are those we want to hear".

It is sometimes said that Corbyn and co are not interested in winning elections. I don’t think that is true. The problem is that their double confusion between party and movement and party and public means that they don’t know how to. Instead of winning over the electorate, they will carry on accumulating members, waiting for some illusory tipping point where mass party becomes mass appeal. In the wake of a decisive general election defeat – for that it is what is overwhelmingly likely to happen - they will have the party, but Labour as a national electoral alternative and agent of potential social transformation will be finished for the foreseeable future.  

This piece originally appeared in Renewal.

Paul Thompson is Professor of Employment Studies at the University of Stirling and was a founding editor of Renewal.