Christ Church’s Dr John Thanassoulis has suggested a cap on the amount of money banks can pay out as bonuses. Under his proposals, bonus pools would be limited to a percentage of a bank’s balance sheet.
Thus a ten percent cap would mean that a bank worth £10 million would not be able to pay out more than £1 million on bonuses each year.
A study conducted using the financial data of 20 global banks calculated that the proposed system would reduce the bonus pool of each bank by up to 3 billion US dollars.
The study notes that bank bonuses are a significant cause of risk. Approximately ten percent of banks and financial institutions listed on the New York Stock Exchange can account for over 80 percent of their total share equity in banker’s pay and bonuses.
Following the financial crisis the political drive to cull the banks’ “bonus culture” has become significant, yet the current direction of policy has proved inefficient at reducing risk.
The EU’s policy of explicit caps on individual bonuses and the currently debated US regulatory sign off system have been accused of doing little to aid the situation due to the increase in fixed wages that has resulted.
Despite this, Dr Thanassoulis suggests that bonuses still have considerable value as an insurance policy.
Edward Marr, president-elect of the Oxford Finance Society, said that “inflated fixed rate pay at banksvtt in recent years would surely prove that attacking the city’s right to give bonuses is both a redundant and counterproductive exercise” and that “Dr Thanassoulis’ emphasis on the importance of bonuses seems very sensible”.
“At a time when markets are plagued by uncertainty and the future of the sector seems far from clear, it would surely be beneficial to use a pay structure that facilitates fluidity in the workforce.”
Despite this assurance of the sensibility of Dr Thanassoulis’ proposal, Marr is wary about the practical implications: “Whether in practice regulators will be able to, or even willing to dictate the remuneration policies of the banks is another matter.”