GUEST COMMENT: Gaming the Pay System
I hate to be the one to point this out, but taxing bonuses paid at TARP-receiving banks is about as useful as taxing the pension of the captain of the Titanic.
We've been here before... During the 1970s and early 1980s, taxes on "unearned income" were 98%. Yes really. Yes, 98%. The tax system also tried to be "fair." There were tax breaks for everything from pension contributions, to insurance, vouchers for lunch, mortgage payments, and company cars.
As a result, it became rational for the richest people in Britain (and most of Europe) to spend 50% of their income on paying tax accountants. Predictably, this led to an increase in complexity. When the tax rate was lowered, the amount of cash brought in actually went up.
As taxes rise again, we can expect some funny things to happen. In the olden days, one might be paid in an amazingly complex way, sometimes with funny results. I remember how several City firms gave their staff partridges, hams or turkeys depending upon their rank at Christmas.
There are, however, alternatives to paying bonuses in festive fare. And they include -
Loans: Up until the late 1990s, nearly all banking staff got subsidised mortgages. Looking forward, I expect to see senior executives getting 'loans' in the millions as well as new types of stock options, since of course they have people working for them who are skilled in making numbers look 'right.'
Insurance: After Fred Goodwin pensions are politically sensitive, but you can structure "health insurance" to pay out real money for quite minor things. Stupidly inefficient, but it's not their money, is it?
Cars: Company cars are now pretty rare, though some people still have a fossil in their pay statement of a "car allowance." My model is that company cars will increase and more will be chauffeur driven, and the vehicles offered will be of a rather higher standard.
Expenses: We will see more "liberal" attitudes to expenses as an underhand form of bonus for good performance. This will expand to include conferences held in attractive places, and "team building" meetings. Nothing really new here, so it's easy to slipstream an increase into the system.
Accoutrements: Support staff will be prettier (or more handsome). This is actually a classical result from agency theory, the part of economics that models how executives choose to get their rewards. It also predicts better offices, higher quality in-house catering, and access to an improved corporate wine cellar. And yes of course, some executives travel to French chateaux to select the contents, along with wives and/or secretaries.
Accommodation: Some firms already provide luxurious apartments for senior staff to help them when they "work late" and can't get back home, or when the commute from their real home is too tough for the poor dears. That's going to increase, partly because they can currently be bought cheap.
But all this is very inefficient. The best way to give someone 1 of benefit is to give them 1. I have no interest in a flash car, and would rather holiday with my family than colleagues, but if you work in banking that may not be for you to decide.
Dominic Connor is a Director of P&D Quant Recruitment
