The Idiocy of Bonus Caps

No company pays its workers more than their worth, it’s for this reason that ideas that the minimum or living wage are so job destroying, as jobs that produce value less than the level set for these wages become unprofitable and so are removed.

In many jobs however, the value that a worker produces can change year on year, and so bonuses are offered to reward those that produce significant value and incentivise others to do the same. But at the end of the day the value of the wage + bonus is still less than the value of the work done by the employee- otherwise the business could not be profitable.

Talk of capping bankers bonuses therefore is utter madness. It is the one performance related area of their pay, the one discretionary part that incentivises them to act in a profit making way. Capping bonuses means that ‘good’ bankers can not be rewarded for success while ‘bad’ bankers would not be punished for failure as significantly, as they would not lose out much.

Furthermore, a cap on bonuses would see a further brain drain of talent away from British financial services, probably to places like Switzerland or America. It would be devastating to lose such wealth creating talent, especially when our economy is as shaky as it is now and so much of our tax revenue comes from the city of London.

To compensate for this banks would have to raise standard pay to attract top workers who can only collect a limited bonus. Without the ability to reward success both good and bad bankers would end up being paid similar amounts. Paying more for bad bankers without incentives for good ones to go the extra mile would inevitably see costs rising, which would impact on the consumer through higher prices.

It is madness to ever think the Government knows better how to spend money than a private company or individual, especially when it comes to their employees or personal needs. Private companies exist to make a profit and so have to pay workers less than the value they produce. Bonuses therefore are just rewards for a success that is larger in value than the bonus itself.

Capping bonuses is the politics of envy and the economics of ignorance. It would be a ruinous step towards lower tax revenue, higher consumer costs and lower economic growth. If you dislike the way a company pays its employees don’t use its services. The Government should not compound its growth destroying idiocy of bailing out losers with then controlling what every financial institution can pay its staff, not if it ever wants to come out of the current economic slump.

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