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Bonus Envy
February 2009

If the claim is that big bonuses reflected only transient profits, the flipside is that the variability of bonuses in response to changing conditions is a healthy feature of the free-market system. Economists squabble among themselves about many things, but they usually agree that wage and price flexibility ease adjustment to fluctuations in demand. On that basis, the bonus culture should be applauded rather than condemned.

The truth is that the attack on bankers' pay has been largely motivated by envy and resentment. Film stars and Premier League footballers receive sums of money which are even more outrageous relative to average pay than what bankers earn, but no one has the guts to advocate income controls for them. The FT has so far not dared to suggest that Ofcom should curb how much is paid to TV personalities, that the Football Association should impose limits on top players' remuneration and that the Arts Council should restrict the bonus culture for world-renowned opera singers.

Why are the Pavarottis and Domingos of bond trading somehow more reprehensible than the Pavarottis and Domingos of international opera? On what grounds should the David Beckhams and Wayne Rooneys of corporate finance be penalised relative to the David Beckhams and Wayne Rooneys of football? Despite a common misunderstanding, bank bail-outs are loans which must be repaid and are not "government expenditure" at all. The notion that the City of London receives official subsidies is preposterous. But who can overlook the fact that many TV stars benefit from licence-fee money, and that opera and sport attract an assortment of government handouts?

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TDK
February 10th, 2009
9:02 AM
The bonuses were paid out of the short term increase in Capital value. In the long term the value collapsed. Bonuses attached to short term performance will skew the market to favour behaviour that creates value in the short term over behaviour that obtains a smaller short term return in favour or a larger longer term one. The banker with the bonus doesn't care if the long term bubble collapses - he won't be there. I'm not averse to large bonuses but there must be a control that a. Prevents bonuses being paid out of a speculative bubble. b. Rewards genuine performance that benefits the ultimate customer. As an example of (b) I note that investment banks take the same fee regardless of whether shares go up or down. Now I understand that the banks have to have some fee to survive in a down time but the incentives should reward the desirable behaviour.

Tom
February 6th, 2009
2:02 PM
Opera singers did not cause economic collapse. Greed and stupidity from bankers did.

Anonymous
February 4th, 2009
11:02 PM
The answer to this question is simply that the payment to a banker will encourage the taking of risks and associated social ills. No such side effect occurs when the same sums are paid to footballers/movie personalities.

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