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A partial defence of banking bonuses

Allister Heath
FINANCIAL voyeurism has arrived with a splash &ndash; and it is unlikely to go away again. Yesterday&rsquo;s report from New York, details of which can be found on our front page, make rivetting reading. The numbers for Goldman Sachs are fascinating and confirm its reputation as a money-making machine: read the raw data and marvel (and for those of you who are Goldman-haters, remember that it was forced to take Tarp cash).<br /><br />No fewer than 6 individuals received bonuses of $10m or more; 21 made at least $8m; 78 received at least $5m; 95 were on $4m (the figures are now truly incredible) or more; an astonishing 212 individuals received bonuses of $3m or more; and in true millionaire factory-style, 391 Goldmanites made a bonus of $2m or more. Overall, the top 200 bonus recipients received roughly $1bn. The stats are out of this world. These sorts of data releases will become routine in the UK too if the government has its way and forces banks to publish them.<br /><br />The story is a great guide for aspirant millionaires &ndash; but what should we be thinking of all of this? My take is 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. I have no problem with somebody who makes $50m trading equities in a fair manner for his firm and is then paid $10m. 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 continues to reward genuine success.<br /><br />Banks should operate maluses in bad years (with cash deducted from accounts) as well as bonuses to eliminate excessive risk-taking. The same principles should apply to nationalised banks: employees who are helping to put a firm on a sound footing and repay taxpayers should be compensated; everybody else should be fired with no payout for failure &ndash; especially those whose mistaken decisions caused their organisation to collapse. But what do readers think?<br /><br /><strong>TAXING OURSELVES TO DEATH</strong><br />Stress-testing is all the rage but it is rare to see it applied to tax policy. So it is good to see that the Centre for Economics and Business Research has attempted to do just that. Its study, commissioned by the TaxPayers&rsquo; Alliance, models the impact of two different policy options: first, an increase in the top rate of income tax to 50 per cent; second, a programme including a rise in the basic rate of tax to 25 per cent, the top rate to 50 per cent and corporation tax to 31 per cent.<br /><br />The results are striking. The 50p tax will cut economic growth by 0.4 per cent, increase borrowing by &pound;1.8bn a year and hike the jobless rate by 0.8 per cent by 2020. The second option would raise &pound;15bn a year in the first three years, but reduced growth would eventually reduce tax receipts by &pound;33bn a year by 2020/21.<br /><br />Tax hikes won&rsquo;t fill the black hole at the heart of the public finances; by further debilitating an already long-term sick economy, they will merely make matters worse. There is only one solution: we must spend less. <br /><br />allister.heath@cityam.com