Bonus debate is heading out of control

THE row over City bonuses shows no signs of petering out, certainly if the last 24 hours is anything to go by.<br /><br />&nbsp;Yesterday the focus of everybody&rsquo;s attention was Bob Diamond&rsquo;s BarCap and its &pound;30m offer to hire Todd Edgar, a commodities trader, and four other members of his team.<br /><br />Edgar and his colleagues left rival JP Morgan a couple of weeks ago and there were reports &ndash; denied by some &ndash; that the traders&rsquo; former employer has complained to the Financial Services Authority (FSA) that it transgressed its new code on City remuneration.<br /><br />BarCap is not amused by the suggestion it has &ldquo;spat in the face of the regulator&rdquo; and contends that it is keeping the authorities fully informed about all its ambitious hiring moves. <br /><br />But the timing of the row is not propitious.<br /><br />All of the talk about bonuses has been too much for shadow chancellor George Osborne, who is determined to outdo his political opponents in being tough on the banks. <br /><br />Tough on the City, tough on the causes of the credit crunch, seems to be Osborne&rsquo;s pre-election mantra, though there must be a doubt he would continue with his anti-banker approach when, as seems likely, the Conservatives get into power.<br /><br />Says Osborne: &ldquo;These banks need to live in the real world, where the country&rsquo;s in a deep recession, and where the taxpayer has spent billions of pounds, not just bailing out some failed banks, but also underpinning the rest of the banking system.&rdquo;.<br /><br />What would Osborne do to remedy the situation? Would he ban the City&rsquo;s golden hellos? Would he ban bonuses? Would he ban guaranteed bonuses, currently being offered to some? I think not, unless he wants a City revolt on his hands.<br /><br />City A.M. editor Allister Heath recently wrote that any individual who creates wealth for his employer in a legal, honest and sustainable manner (in other words, that his work doesn&rsquo;t endanger his firm or the financial system) is entitled to be paid as much as he is able to negotiate with his employer.<br /><br />&ldquo;I have no problem with somebody who makes $50m trading equities in a fair manner for his firm and is then paid $10m,&rdquo; he wrote.<br /><br />&ldquo;However, anybody who has lost money should get nothing and be fired; guaranteed bonuses are meaningless and should be phased out. Deferred compensation schemes would discourage certain forms of short-termism (such as investing in mortgage debt which eventually turns out worthless) but continue to reward genuine success.&rdquo;<br /><br />That seems a sensible way forward to me, rather than reaching out in a knee-jerk fashion towards some sort of legislative solution, which becomes more likely as long as investment banks fall out with each other.<br /><br />Setting up a High Pay Commission to look at the evidence as suggested yesterday by think-tank Compass, might also throw some light on the issue.<br /><br />The government, which appears hamstrung, now seems to be in danger of opting for legislation it hopes will put a stop to the headlines suggesting it is being too soft on the City. There is a real fear this is spinning out of control.<br /><br /><br /><br /><strong>&bull; Allister Heath is away</strong>