Corporate Bonuses and a Lesson from Britain

As we continue to cogitate over the 50% tax announced by the British Government (and supported by the French Government) on bonuses paid by banks, we understand even better the wisdom of the decision.

It will be during the next two months that boards throughout the financial system will meet to approve bonuses for officers and other employees.  As the criticism rained down on Goldman illustrates, some financial institutions can be counted upon to pay bonuses that reflect a certain tone deafness to the current financial crisis and economic difficulty.  In other words, they will pay bonuses that look excessive given current circumstances.  These amounts will be disclosed as part of the proxy process or leaked to the press. 

Thus, without any serious change, the public is likely to be treated to a series of stories, one after another, about excessive pay packages and bonuses.  As foreclosures rise and unemployment remains in double digits, these announcements will likely stoke considerable voter anger, particularly at incumbent politicians. 

By imposing a 50% tax, the British Government significantly raised the costs of bonuses above L 25,000.  As a result, the amounts announced over the next few months in Great Britain are likely to be lower than they would have.  There will be fewer instances of outrageous bonuses and fewer instances of voter anger at incumbent politicians.

In the United States, however, where there is no increased cost associated with the bonuses, excessive payments are likely to occur.  The only thing in those circumstances that can be done to reduce the predictable anger is to have a solution ready.  In other words, the Administration even more needs a long term fix.  The British Government, through the imposition of a tax, has more time.