Free Market Constraint

The political right has doggedly stuck to its belief that “market forces” must be allowed free reign in almost every aspect of life, despite evidence in specific areas that the philosophy clearly does not work. One area that is less contentious, surely, is that market forces should be allowed to determine remuneration for business leaders; although the same principles drive down remuneration for average workers, of course.

The global financial crisis has been squarely blamed on the banking sector. Many financial institutions required public money to keep them afloat in the depths of the crisis and this brought scrutiny and public opprobrium on the remuneration paid to the small minority of top earners within the sector.

Whilst the UK was opposed to a 0.1% “Tobin tax” on European financial transactions, fearing it would drive financial houses away from the City, coalition politicians were openly touting the merits of a cap on bankers’ bonuses – despite the clearly contradictory idea that personal financial loss would not propel these key business leaders to set up shop elsewhere…

A draft agreement has been announced by EU officials that bankers’ bonuses will be capped at a maximum equivalent to an additional year of base earnings; although this can be doubled with shareholder approval. The measure needs approval of EU financial ministers, but this is regarded as a formality. The UK, interestingly enough, is now opposed to the measure, having become convinced that such a measure could drive away talent and restrict growth in the sector – a reversal they did not trumpet to the British people, of course.

According to one of the architects of the proposal, the European Parliament's chief negotiator, Othmar Karas: "For the first time in the history of EU financial market regulation, we will cap bankers' bonuses. The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small and medium-sized enterprises and jobs."

The legality of constraining earnings within private companies may well be tested before a competent tribunal, one imagines – so much for market forces.