For most people it seems, the economic crisis is getting a bit old now; it has been almost 6 years now. What’s more it seems that, amongst a large portion of people at least, everyone knows, or at least thinks they know, whose fault it is – the bankers. Whether you agree or not, there is no doubt that the PR pros in the financial services industry have probably been working 12 hour days for the last few years.
For some then, the recent EU proposals to cap bonuses across the continent will have been entirely expected. But what effects will this dramatic decision have on the UK finance sector? How will Europe, more importantly London, fare when faced with these new restrictions?
The plan itself is to limit bonuses to 200% of base salary from Paris to Berlin and everywhere else in between. In effect it means an employee on £100,000 a year can only receive £300,000 in total remuneration. For many of us, that probably doesn’t sound too shabby, but for much of the top talent in the industry there are better offers elsewhere. In fact, that is the primary fear of the City firms that have openly criticised the proposals – that the best and the brightest will leave London and indeed Europe altogether and take their skills, contacts and financial savvy to Asia or the US.
The fear is well-founded; London often claims to be the financial capital of the world, but it is a tight race and a move such as this could easily see New York, Shanghai or Switzerland take the lead. Further afield, but still vitally important for the wider European economy, Paris and Frankfurt would also be hit by a bonus cap, costing the economy dearly and potentially thousands of jobs to boot. Whilst this scenario is very much a possibility, albeit of the worst possible outcome kind, it isn’t the only potentially grim option.
London is unlikely to want to give up its title without a fight and therefore it can be assumed that City firms would do everything they could to keep business here going. It is highly likely that, in the event of a bonus cap, employers would instead dramatically increase the base salary of their employees, giving them a greater potential for bonus payments. This of course would be counter to everything that the EU proposal is seeking to achieve, but it would also create an inflexible cost base and therefore seriously affect our ability to deal with future financial crises.
At the height of the recession, despite several often sensationalist news stories to the contrary, the vast majority of financial services employees lost their bonuses entirely. Whilst it is clearly a nasty business, this is all part of employers reducing their costs in order to return to profit. By paying people higher base salaries and focusing less on bonus payments, employers lose their ability to be flexible at times of crisis, potentially damaging their ability to react to economic shocks.
Looking at things objectively it seems that should the proposals go ahead, the only winners won’t be in the financial services industry, but will instead be those seeking to win over the electorate with a bit of public banker bashing, or those sectors such as hedge funds and private equity operations which are unaffected by the rule.
So for now we just have to wait and see what happens. Hopefully Europe will somehow manage to maintain a competitive edge over our other global rivals. If it all goes wrong though, it might be time to take up that Swiss German course you were considering, develop a love of bagels and yellow cabs or Tai Chi and Asian cuisine and/or start practising your yodelling.