Executive pay has been a delicate issue in the United States where the Obama administration's "Pay Czar," Kenneth Feinberg, has been asked to keep bonuses for top financial managers disciplined without driving off top talent.
However, French President Nicolas Sarkozy and British Prime Minister Gordon Brown have been more blunt about exacting a toll on the financial firms that required taxpayer bailouts.
The United Kingdom on Wednesday announced plans to levy an immediate 50% tax on discretionary bonuses greater than 25,000 pounds, or about $40,000. The U.K. Treasury estimates the tax will affect 20,000 bankers and bring in about 550 million pounds, or about $894,000,000. However, some bankers have suggested the tax would reap about 4 billion pounds, or $6.5 billion, if firms press ahead with large bonus payouts regardless of the tax, the Financial Times reported.
U.K. financial firms were preparing to set aside as much as 6 billion pounds ($9.7 billion) in bonuses for 2009, 50% more than 2008, according to an October report by the Centre for Economics & Business Research Ltd., a London-based research firm.
Bankers and financial institutions decried the measures as harsh and unnecessary, many of them threatening or making preparations to leave.
One investment banking chief told the FT that the "contract between government and business is broken," and that as much as 40% of City of London operations is "mobile" and planning to move to more business-friendly counties.
Still, U.K. Chancellor of the Exchequer Alistair Darling was unwavering in his decision.
"Across the world we need to be a little more realistic and change the culture," Darling said in an interview with Bloomberg Television . "It's almost people think it's a given that you have to pay these very large sums of money or you can't get on."
"It would do no harm at all to say now is not the time to be paying out these high bonuses," he added. "Banks really ought to be building up their capital position" rather than funding payouts."
Darling and Brown were joined yesterday (Thursday) by France's Sarkozy, who announced the imposition of a 50% tax on bonus payouts of more than 27,000 euros, or about $40,000.
One senior government official told the FT that a bonus tax had been under consideration for some time but had not been employed because of fear that it would damage Paris as a financial center.
"The fact that London has introduced it has changed the landscape," the official said.
Now, Sarkozy and Brown are calling on other nations to follow their lead. In an editorial published in The Wall Street Journal , the two European leaders pointed out that "huge and opaque global trading network involving complex products, short-termism and too-often excessive rewards created risks that few people understood," and that "when crises happen, taxpayers have to cover the costs."
They called on global banks to recognize the risks to the taxpayer if banks fail, as well as the imbalance between risks and rewards in the banking system. However, the need for a one-off tax on executive bonuses should be considered a top priority because bonuses are largely the result of government support for the banking system.
Of course, such a tax has little chance of materializing in the United States. Here, pay czar Feinberg has been met with stiff resistance from Wall Street.
Feinberg said in October that he reduced 2009 cash salaries for American International Group Inc.'s (NYSE: AIG) 13 top-earning executives by 91%. However, Bloomberg recently reported that he might exempt some of the company's employees from a $500,000 salary cap after at least five employees threatened to resign.
Feinberg also allowed a combined $2.6 million to be paid to AIG's Chief Financial Officer David Herzog and Kristian Moor, a property-casualty chief.
AIG was bailed out last year with more than $180 billion in taxpayer money.
News & Related Story Links:
- Financial Times:
Bankers furious at UK bonus supertax - Bloomberg News:
Darling Calls for Change in U.K. Culture Over Banker Bonuses
- Financial Times:
France follows UK on bank bonus tax
- The Wall Street Journal:
For Global Finance, Global Regulation
- Bloomberg News:
Feinberg Said to Lift $500,000 Cap for AIG Executives
- Money Morning:
Bank of America Hopes to Lure Top Shelf Talent by Paying Back TARP Loans