Thursday, July 01, 2010

Will the EU's "tough" new rules for bonuses actually reduce excessive risk-taking?

The brief answer is: No.


Because the bonus rules say nothing about how much risk is taken or the context in which it is taken. Nor do the rules limit the quantity of the bonuses that may be given!

The rules simply say that between 40 and 60 per cent of bonuses will have to be deferred for three to five years, and that half the bonus actually paid out will have to be paid in shares or in other securities linked to the bank’s future mid-term performance.

In addition to simply delaying a proportion of the bonus money getting to them (how much of a disincentive is that?) the move forces all EU financial services companies to link 20-30% of a year's bonus to medium-term performance of the companies concerned.

That percentage is too small to act as a material disincentive to excessive risk-taking in the short term.

Assuming the same overall bonus as earlier, all that the EU move means is that the immediate reward for risk-taking is going to be less now than it used to be, in terms of the proportion available to the person at the end of year concerned.

The only really good thing about the proposed legislation is that any banks bailed out by taxpayers are going to have to rebuild their capital first and repay those funds before being able to give any bonuses to employees.

The EU move may be only a very small move in the right direction but, unless that is matched by Asia and the USA, it will mean merely that the most mobile and brilliant of risk-takers will move to those locations. Sphere: Related Content

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