News

The article was written by Pam Loch:

 

Bonuses again hit the headlines last week with Lord Turner, the head of the UK Financial Services Authority (FSA) entering the debate.  Controversially he has been quoted backing the introduction of taxes to curb bonus payments. 

 
Was he misquoted or was Lord Turner suggesting a tax in the UK would control bonuses and restore trust in the financial sector?  If so, what would be the implications for businesses in the UK trying to attract and retain talented employees in the future?  

  
The Tobin Connection

Lord Turner was alleged to be backing a tax which became known as the Tobin tax after the economist James Tobin.  Suggested as a way to prevent speculative trading in the 1970’s, the tax has continually been resisted by the financial sector. 

The Tobin tax operated by imposing a tax on international transactions.   Lord Turner was quoted as being “happy to consider taxes on financial transactions”.  This has been greeted with horror by businesses concerned about the impact it could have on businesses in the UK engaging in international transactions. 

Employees working in those businesses would be affected with their potential earnings being reduced as a result. 

With signs of UK and global recovery, employers who have already reduced staffing levels are keen to retain their employees.  Employers in a still fragile UK market therefore are rightly concerned about the impact such a tax could have on their employees’ earning capacity.

In a television interview with Sky News however Lord Turner tells a slightly different version of events.  He recognises that there may remain concerns amongst the general public about bonuses being paid for work that may not be “socially valuable work”.  However if that is the case, the FSA as a regulator cannot control bonus levels.  His original point was that if there is a concern then there is a choice to be made.  Either;

1.    Impose capital adequacy limits that increase the amount of reserves that have to be retained so that there is less profit to distribute as bonuses, or
2.    Introduce a tax like the Tobin tax that would achieve a similar goal of reducing the funds available to pay employees.

The FSA cannot introduce legislation but Lord Turner did make an important point that any changes to the UK system should not be made isolation.  Specifically an international agreement would be necessary.

 
There is no doubt that the subject of bonuses is now a highly sensitive and emotive subject.   The reality though is that most employers want to ensure they incentivise their staff to perform to the best of their ability and bonuses remain a key part in achieving this.  Bonus arrangements have become an increasingly common element of remuneration packages to motivate and incentivise employees - a lawful performance enhancer.  

 
If bonus arrangements have been designed well then they should incentivise the employee and the employer should benefit from their good performance. Many will argue that this is a matter between the employer and the employee as the businesses involved are private entities. 

 
Of course a dilemma arises where the businesses are partially “owned” by the UK Government or where the actions of the employees to achieve their bonuses could have an adverse affect on the UK economy.  Thrown into the pot is the tax successful businesses and employees pay on their bonuses to the UK treasury.

Directly limiting bonuses would be difficult and problematical.  The UK Government would in effect have to introduce legislation that would impose a new contractual clause to override any express bonus entitlements in contracts of employment.  The legislation would somehow also have to deal with discretionary bonuses in addition to contractual ones. 

It would also have to provide some form of “immunity” to employers from being sued for breach of contract by their employees for non-payment of their full bonus entitlement based on their contract of employment.   Then there is the question of retaining those employees and rewarding them.  

     
With all the potential difficulties that can derive from limiting bonuses by direct intervention in the employer/employee relationship, it is more likely that the UK Government will prefer the alternatives mooted by Lord Turner.  If the UK Government acts alone however the negative impact on businesses and crucially on their ability to retain the best employees, is likely to be very significant. 

With concerns remaining though about bonus levels, it will remain a topic high on the agenda in the UK and global arena too.  A global response should not necessarily be ruled out. 

 

Employers therefore should not ignore the possibility that alternatives to bonuses may be the way forward to avoid intervention in their businesses and consider identifying other ways to incentivise and reward their employees.