As UK banks start scrapping the bonus cap, Emma Revell argues why this is a good thing – and what the NHS could learn from it
People hate bankers almost as much as they love the NHS. So unsurprisingly, the return of big bonuses to City pay packets is not without controversy.
In what may be one of the few lasting legislative legacies of Liz Truss’s short-lived government, the rules which limited bonuses to twice an employee’s salary were scrapped last year (something many City A.M. readers probably don’t need me to tell them). After months of consultation, and following a vote at their AGM, Barclays recently announced they would be the first UK lender to change their rules, with lucky employees now able to take home a bonus of up to ten times their salary.
With bankers deeply unpopular even 15 years on from the financial crisis, this is a daring move. Even though the Labour government said they have no plans to reintroduce the cap, YouGov found 51 per cent of people ‘strongly support’ bringing the cap back down to twice salary, with only 19 per cent either ‘strongly’ or ‘somewhat’ opposed to keeping the limit there. But luckily for staff at Barclays and other major financial institutions, public opinion doesn’t hold much sway when it comes to setting their pay.
The truth, though, is, that on this one, the public are just plain wrong. The rules never really made sense. Nor did they achieve what they were supposedly set out to do.
When the cap was introduced – by the EU, as it happens – policymakers argued that financiers were too cavalier, too eager to chase big short-term gains and personal rewards at the expense of the long-term stability of the institutions that employed them.
As Chancellor, George Osborne pushed back, fearing the damage that would be done to London’s position as a financial hub if American and Asian markets could outbid it for the best talent on pay. But Brussels insisted.
Yet the incentives of pay caps were always counter-productive. Fixed salaries increased in order to compensate for the lack of bonuses. And instead of reducing risk-taking behaviour, the cap may have increased it: yes, there was less chance of a personal bonanza, but you were also insulated on the downside if things went wrong. Without the carrot, employers also found it much harder to penalise underperforming staff as fixed remuneration gave them less wiggle room.
Ultimately, though, there’s a point of principle here. Overall, it should be none of the government’s business what a private company pays its employees. Remuneration is a matter for staff, managers and ultimately shareholders, who see the value in the flexibility to attract and retain talent.
Wait a minute, though. Aren’t I the person who just last week was in these pages cautioning against a massive 22 per cent pay rise for junior doctors?
Yes, and at a basic level the argument for paying NHS staff more is not dissimilar to why London’s financial centre needs the freedom to offer the big bucks. Much has been made of the trouble the NHS has in attracting and especially retaining staff. Healthcare recruiters from Ireland, Australia and Abu Dhabi have been openly advertising jobs paying double, even triple the going NHS rate – with some going as far as handing out leaflets on the picket lines as NHS workers went on strike outside hospitals.
In this regard, the NHS does need greater flexibility over its pay so it can better incentivise workers into harder to fill specialties or locations.
But there are also significant differences. The main one being that bankers’ bonuses are not paid by the taxpayer. Funding them does not add billions of pounds to the government’s outgoings each year, necessitating the tax hikes Rachel Reeves has all but committed to pushing through in the autumn. Nor do those rises come off the back of 18 months of strike action which has imperilled the health of millions of patients via cancelled appointments and delayed operations.
Another difference is scale. A pay packet in the millions and a potential bonus in the tens of millions might sound like a huge amount, but it’s something only a fraction of a percentage of people working in financial institutions take home. As Barclays themselves have told staff, in diplomatic terms, the move “should not change colleague expectations around total compensation”: basically, don’t get your hopes up.
Yet such is the size of the UK’s public sector, even a small percentage increase can – when applied across the board – end up costing billions.
The lesson from all this is not that we need to regulate and plan the City in the same way we do the NHS, but rather that we need greater flexibility and market responsiveness in the NHS. Indeed, you could even make the heretical case that the NHS has a lot to learn from the bankers.