The European Bonus-Capping Plan

Michael Scott Moore was a 2006-2007 Fulbright fellow for journalism in Germany, and his first novel, Too Much of Nothing, was published by Ca...

Why euro-bashers could turn against the dollar, and how they might be stopped.

European officials aren’t the only Westerners wrestling with what Islamic women wear "” leaders in Quebec have joined the fray.

How did such an un-American-sounding idea as banning someone’s religiously inspired clothing choice take root in Western countries?

A U.S. immigration court creates a new persecuted group in Europe: Christian home-schoolers.

A grand explanation for the Great Information Gather on anyone who crosses an international border.

Whether a government or a private company gathers data, Europeans get nervous.

Will it give European intelligence agencies access to U.S. banking records?

Should the U.S. and Europe bring back the visa? Because “visa-free travel” to America no longer exists

No sooner are new electronic identification methods out on the street than do electronic tricksters (and presumably cyber bad guys) hack them.

How it happened, who will benefit, and how hard will it be to counterfeit these things.

Receive 1 year (6 issues) of our print magazine for just $24.95. Miller-McCune features polished, in-depth reports on research and solutions across the policy spectrum "” from health care, education and energy to international affairs, poverty and the global economy. It's a must read for well-informed and solutions-driven individuals.

close this window

We encourage you to share any articles or material you find on Miller-McCune.com with friends and colleagues. Please fill in the fields below with the name and e-mail address. Then fill in the same information for you. Miller-McCune will not keep any information about you or your friend, and the e-mail your friends receive will appear to have come from your e-mail address. The asterisk (*) denotes a required field.

July 20, 2010

Europe gets it just about right by not strictly capping pay but regulating how the payout wends its way to a banker’s pocket.

A week or so before the U.S. Senate passed the biggest Wall Street overhaul since the Depression, the European Parliament voted for some of the world’s strictest rules on bankers’ compensation. These “bonus caps” should be imported quickly to Washington, while the spirit of reform is still fresh.

Next year EU bankers will start taking home an up-front limit of 30 percent of their bonuses, deferring the rest for three to five years. They risk losing some or all of the remaining compensation if their investments go sour, or if their banks go bust. (Some large bonus packages will be limited to 20 percent payouts up front.) The idea is to tie the financial industry’s exorbitant bonus packages to performance "” to keep bankers from gambling the health of a bank itself, then walking home with the loot.

Limits are a good idea because the culture of outrageous bonus payments encouraged the sort of high-risk speculation that brought down so many major banks "” and nearly the Western credit system "” in 2008-09. “The current bonus system in the financial sector encourages the behavior that wrecked our economy,” writes researcher Sargon Nissan at the U.K.’s New Economics Foundation. “[It] breeds short-termism and speculation. It pushes bank staff into overstretching their institutions’ capacity to bear risk.”

The main argument against limits, of course, is that ham-handed government interference in the free market of bankers’ pay will drive talent to more lawless frontiers, like Asia or Switzerland. Sharon Bowles, chairwoman of the Economic and Monetary Affairs Committee in the European Parliament, gave a tart retort to this notion. “I say good riddance,” she wrote recently in Bloomberg Businessweek. “Go play poker with the Swiss franc, but not anymore with the livelihoods of 500 million European citizens.”

The subtlety of the EU solution is that it’s not a true limit. Banks can still pay traders and executives as much as they care to fork out "” the rule just spreads those millions over several years in a kind of escrow account. It has the beneficial side effect of ensuring that a bank will maintain a larger bundle of cash in case its investment arm (or the whole credit system) tanks. Billions of euros in withheld bonuses will therefore offer precisely the right insurance against the day when a government might be called on "” again "” to pour massive amounts of “liquidity” (read tax money) into a stumbling finance industry.

There’s nothing wrong with bonuses: They’re just incentives, which can be organized by a firm, an industry or a government to nudge individuals toward the productive and the good instead of the suicidal.

So far America just has toothless “guidelines” from the Fed that more or less agree with the European ideas. And the ideas aren’t un-American: A Harvard study, “The Wages of Failure,” from late last year argued that executives working for Lehman and Bear Stearns had solid bonus incentives to run their banks to collapse in 2008. “Firms and regulators would do well to devote considerable attention to examining how the design of performance-based compensation can better link the payoffs of executives with long-term results,” write the authors.

Europe has listened, and the new regulations could change the banking landscape in an unexpected way. They won’t send Frankfurt or London traders to Wall Street in search of strictly fatter bonuses, though it might send them to Wall Street in search of quicker bonuses. President Obama has toned down his rhetoric about financial compensation since his flash of anger in early 2009; now he’ll have to decide whether America wants those sorts of people moving to Manhattan.

This website uses IntenseDebate comments, but they are not currently loaded because either your browser doesn't support JavaScript, or they didn't load fast enough.

Name (required)

Mail (will not be published) (required)

Website

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

If something has been around longer, it must be better. New research suggests we hold onto that bias even in instances where quality has nothing to do with longevity.

"˜Countdown to Zero,' a documentary history of nuclear weapons and possibility of radioactive terrorism, offers a cautionary tale for atomic powers.

New research suggests one reason women are underrepresented in science and math is they see such careers as impeding their desire to help others.

Fannie Mae and Freddie Mac try to block a municipal program that makes solar roofs affordable for homeowners.

Beyond the human carnage of Mexico’s drug conflict, another innocent bystander "” the environment "” has long been a victim.

David Cope’s software creates beautiful, original music. Why are people so angry about that?

In which phosphorus, a substance present in every living cell, is being used up and flushed away.

An angry Mother Nature and increasing urbanization have led Columbia’s Dickson Despommier to urge agriculturalists to consider tilling vertical farms in high-rises. A Miller-McCune.com interview.

Two academics studying psychology conclude that when self-control has been weakened by depletion of its resources, selfish and dishonest behavior may readily ensue.

Two Cornell psychologists found we have two separate systems for memories, which helps explain how we can “remember” things that never happened.

Read Full Article »

Related Articles

Market Overview
Search Stock Quotes
Partner Videos