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Britain In defence of bonuses: experts warn on banker pay caps

The screw-tightening comes amid public fury at big payouts -- thousands of people have joined groups on the Facebook Internet site with names like "Bankers Are Leaches", "Impudence: The Act Of UBS Bank" and "No Ifs, No Buts -- Give Up The Bonus, RBS."

But taking too tough a line with banks could have unintended consequences for taxpayers according to academics and insiders, who say the risks include banks losing their best staff and their share prices falling even lower.

Scenting public anger, political leaders worldwide have had harsh words for bankers who handed out hefty rewards even as the world economy started to tank.

US President Barack Obama last month branded the behaviour of Wall Street bankers "shameful" and is imposing a half-million dollar (391,000 euro) salary cap on executives at firms which have received a Treasury bailout.

British Prime Minister Gordon Brown has pledged to end the "short-term bonus culture" and backs a "clawback" system, under which bankers may have to pay back historic bonuses if it turns out they made bad decisions.

His government has announced a review of bank governance, including bonuses.

Meanwhile, French President Nicolas Sarkozy has told bank bosses to forgo 2008 bonuses as a condition of receiving state loans, while a new code of conduct for traders' salaries is being introduced.

But experts warn clamping down too hard could have some adverse effects, starting with the best bankers quitting state-owned employers in search of better bonuses at privately-owned competitors.

Peter Hahn, a fellow at Cass Business School in London and ex senior Citigroup banker, used the example of Britain's Royal Bank of Scotland (RBS), now 68 percent state-owned, to show how a flight of talent may work.

"If I'm Barclays or HSBC or anyone who's got by without state money, if I was a CEO I would send an order down and say "what's RBS good at?'" Hahn told AFP. "I'd pick off all the people who aren't going to get bonuses."

David Marsden, professor of industrial relations at the London School of Economics, agreed, saying: "The big unknowns about capping relate to the ability of the capped banks to recruit and retain their star dealers and managers if other banks do not cap bonuses."

Caps at state-controlled banks could also affect the way staff take decisions there, again with implications for their de facto owners, the taxpayer.

Hahn said it was important for banks to "take the right kind of risk".

"If you're the head of a major bank and you don't get paid for risk, your incentive is just to be ridiculously conservative," he added.

"You want banks to understand and regulate risks but you want them to take risks because that funds growth in the economy."

Some argue that, when the upturn does finally come, banks which are majority state-owned may be in a downward spiral and ill-placed to capitalise on it.This would make it hard for governments to sell on their stakes and recoup their money.

"Be careful not to let your desire to punish City boys get in the way of clear thinking," former Cantor Fitzgerald trader Venetia Thompson wrote in Britain's Spectator magazine this month.

"It is the new owners of these public sector banks, the taxpayer... who will ultimately lose out.

"Their shares will continue to plummet and ultimately result in costing the government and the taxpayer even more."

Others say that, despite all the political heat and light they have attracted, bonuses are only part of a much bigger problem.

"Bonuses are important but we must not let them distract attention from reform of the whole business," Marsden said. "One has to ask also why other management control systems were not functioning properly."