Also in this issue: read Michael Prest’s companion essay “What is a banker worth?“
Bonus bashing is good politics. Is it also good economics? The argument against limiting bonuses was crisply put by John Thain, until recently head of Merrill Lynch. Thain defended his decision to authorise bonuses of almost $4bn despite his company having lost nearly eight times that amount with an appeal to a free market axiom. “If you don’t pay your best people,” said Thain, “you will destroy your franchise.” Put another way: if banks cannot retain and motivate talented staff, how can they keep capital flowing efficiently around the economy?
Whatever the moral shortcomings of Thain’s argument there are holes in his logic that any reformer should consider.First, the incentive function of large bonuses is to be doubted, at least at the margin. Barclays chairman Marcus Agius said in Davos that too many bankers are used to receiving incentives “for basically turning up.” He is correct. Second, attempts to reform financial pay have not so far challenged the principle that financial services are based on highly mobile human capital and that the rewards to that capital have to be exceptional.
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