How to Cap a Banker’s Bonus
Europe gets it just about right by not strictly capping pay but regulating how the payout wends its way to a banker’s pocket.
By Michael Scott Moore
Miller-McCune
A week or so before the U.S. Senate passed the biggest Wall Street overhaul since the Depression, the European Parliament voted for some of the world’s strictest rules on bankers’ compensation. These “bonus caps” should be imported quickly to Washington, while the spirit of reform is still fresh.
Next year EU bankers will start taking home an up-front limit of 30 percent of their bonuses, deferring the rest for three to five years. They risk losing some or all of the remaining compensation if their investments go sour, or if their banks go bust. (Some large bonus packages will be limited to 20 percent payouts up front.) The idea is to tie the financial industry’s exorbitant bonus packages to performance — to keep bankers from gambling the health of a bank itself, then walking home with the loot.
Limits are a good idea because the culture of outrageous bonus payments encouraged the sort of high-risk speculation that brought down so many major banks — and nearly the Western credit system — in 2008-09. “The current bonus system in the financial sector encourages the behavior that wrecked our economy,” writes researcher Sargon Nissan at the U.K.’s New Economics Foundation. “[It] breeds short-termism and speculation. It pushes bank staff into overstretching their institutions’ capacity to bear risk.”
(More here.)
By Michael Scott Moore
Miller-McCune
A week or so before the U.S. Senate passed the biggest Wall Street overhaul since the Depression, the European Parliament voted for some of the world’s strictest rules on bankers’ compensation. These “bonus caps” should be imported quickly to Washington, while the spirit of reform is still fresh.
Next year EU bankers will start taking home an up-front limit of 30 percent of their bonuses, deferring the rest for three to five years. They risk losing some or all of the remaining compensation if their investments go sour, or if their banks go bust. (Some large bonus packages will be limited to 20 percent payouts up front.) The idea is to tie the financial industry’s exorbitant bonus packages to performance — to keep bankers from gambling the health of a bank itself, then walking home with the loot.
Limits are a good idea because the culture of outrageous bonus payments encouraged the sort of high-risk speculation that brought down so many major banks — and nearly the Western credit system — in 2008-09. “The current bonus system in the financial sector encourages the behavior that wrecked our economy,” writes researcher Sargon Nissan at the U.K.’s New Economics Foundation. “[It] breeds short-termism and speculation. It pushes bank staff into overstretching their institutions’ capacity to bear risk.”
(More here.)
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