The European Union is moving to place an iron leash on bank pay. New rules approved Thursday would put strict caps on bankers’ bonuses. That’s Europe’s latest response to widespread anger at financial firms in the wake of the economic crisis.
Americans are pretty angry at bankers too, but there’s practically no chance of something like this happening here. Like diesel cars, techno music and soccer, capping bank bonuses is one of those things Europe loves that just don’t fare quite as well in America.
“We have not in the States, at least so far, really gone down a path of capping pay,” says Stanford professor Dave Larcker, who studies corporate pay. “I’d be very surprised if you sort of see hard caps come out in the States.”
Wall Street loves the ability to reward or punish with bonuses. A trading blunder cost JPMorgan Chase CEO Jamie Dimon half his bonus year. Still, the $10 million bonus he received was nearly seven times his salary. The EU rule would limit bonuses to no more than double base pay.
Nothing as extensive as the European proposal has moved forward in the U.S. But some things have changed on Wall Street since the financial meltdown. All-cash bonuses are largely a relic of the past.
“A few years ago, if I said your bonus was $100, you got $100,” explains Joe Sorrentino, managing director at Steven Hall & Partners, which advises Wall Street firms and others on compensation. “Now if I say your bonus is $100, well, you may get $25 or $50 now in cash and the rest is gonna be deferred in either stock or cash. And you may not see that for three years from now.”
That shift is to prevent bankers from doing crazy things that drive big bonuses in the short term, but hurt their company, or perhaps humanity, in the long term.
There’s also a problem with capping bonuses. It’s kind of pointless.
“Human ingenuity is boundless,” says Georgetown finance professor Sandeep Dahiya. “The minute the rules are written, you can expect everyone to pore over them and find any loophole.”
For example, if bonuses are capped, firms can just juice up salaries. But that would mean guaranteeing pay before getting results. And that's something Wall Street hates.
So does the City. Banks in London's financial district are complaining about the planned EU restrictions. If the rules go through, they would create a compensation gap that could drive talented and rationally greedy European bankers to competitors in the U.S. and Asia.