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The bonus problem

Bonus bashing is good politics. But is it also good economics?

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…

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