A cap on bonuses paid to City bankers would be “unenforceable”, Chancellor of the Exchequer Alistair Darling has warned.
Proposals to curb excessive pay and bonuses are being pushed by European nations at the two-day meeting of finance ministers from the G20 group of major economies being hosted by Mr Darling in London which ends today.
But the Chancellor warned that the simple cap favoured by countries such as France would not be practical, as top bankers would simply find other ways to reward themselves.
Finance ministers of seven European countries — Sweden, France, Spain, Germany, Italy, Luxembourg and the Netherlands — yesterday denounced the massive payouts which have been blamed for fuelling excessive risk-taking as “dangerous... indecent, cynical and unacceptable”.
In a joint article for Swedish newspaper Dagens Nyheter, the ministers said that bonuses “should be paid out over a number of years and should mirror the individual's and the bank's actual performance over time”.
Their comments follow yesterday's joint letter from Prime Minister Gordon Brown, French President Nicolas Sarkozy and German Chancellor Angela Merkel, floating means of restraining bonuses, such as limiting them to a proportion of a bank's overall profits or introducing “clawback” mechanisms if deals go wrong over a longer period of time. The US has given a lukewarm reception to proposals for pay restraint, giving greater weight to the need for measures to increase banks' capital reserves.
Following bilateral talks with US Treasury Secretary Tim Geithner as the summit kicked off yesterday, Mr Darling warned that to be effective, any measures need to be “global in scope and practical in action”.
Asked about a cap, he told Sky News: “I think it is unenforceable. You can have a cap on a bonus, but if somebody really wanted to get around it, they would just raise their basic salary or arrange for money to be paid in some other way.
“We have got enough experience from countries around the world of what happens with pay policies, especially with people at the top. They are very good at finding a way round it.”
Instead, Mr Darling said ministers should focus on improving the regulatory system to prevent “irresponsible” pay structures and use capital-holding requirements to force banks to retain profits rather than hand them out in “lavish” bonuses.
As the summit began, the International Monetary Fund delivered a positive judgment on developments in the world economy, revising down its prediction for the fall in global GDP in 2009 from 1.4% to 1.3% and upgrading its forecast for 2010 growth from 2.5% to 2.9%.
But it saw most of the improvement occurring in eurozone countries and Japan, increasing its forecast of the fall in UK GDP for 2009 from 4.2% to 4.5%.
Mr Darling said the IMF figures reflected a growing consensus around his own Budget prediction that the UK and world economies would return to growth around the turn of the year.
However, indications that countries like France and Germany may already have moved out of recession should be treated “cautiously”, said Mr Darling, warning that there was still a great deal of uncertainty in the global economy.