THE BLOG

Bankers' Bonuses and the Economy

19/02/2014 10:46 GMT | Updated 21/04/2014 10:59 BST

EU regulations banning banks from paying employees bonuses of more than 100% their annual salary came in to effect on 1st January. It is claimed that bankers receive such big bonuses due to the jobs they create, the business they win and the taxes they pay. A questionable comparison I heard recently was that a bank is like a football club; the business declines rapidly if you remove a great manager or an impeccable individual. The banks believe these individuals can make a huge difference to the economy which is why they are worthy of such large bonuses.

It was high risk products, such as big mortgages that couldn't be paid back, that drove big bonuses triggering the financial crisis and recession in 2008 and if the banks aren't careful their contribution to the economy could deem questionable. There are many other contributors to the growth of our economy including SMEs who often require funding to get them off their feet. Shouldn't some of this money therefore be designated to SME's, allowing them to continue to grow?

SME's are continuing to pop up all over the UK as the economy continues to grow and get stronger and regardless of their size they are all contributing to the rise of our economy. The 9,000 British mid-market companies that make sales of £25m to £250m, account for one fifth of the country's sales. They too should be rewarded with financial support. If SME's receive the funding they need in their early stages, they too could reach the size of a mid-market company, consequently having an increased positive impact on the economy so why are we not giving them the help they require?

Since the new regulations came into force earlier this year, the banks have found a way around the bonus loophole by giving employees monthly allowances that still total around eight times their annual salary, instead. The majority of big banks are using fixed fees for a typical period of three years in order to avoid the payments being labelled as a bonus. The payments are also being linked to an individual's role rather than their performance. It appears British banks are worried about decreasing bonus figures due to the competition they receive from American banks and the fear of their best bankers migrating to the USA to continue to receive these figures. If we move a few money hungry bankers out of the UK to other countries would that be such a bad thing?

Perhaps it would be beneficial for Britain to pick up some tips from Germany as medium-size companies drive their economy. Today one-third of the country's sales, jobs and GDP come from businesses of this size, many of which are family-owned and focus on exports. With the right help and different approaches, Britain's mid-market companies could help grow the economy much further than it already does. We should break up the two main banks we own into regional banks that offer a wider choice rather than the top ones. In the Sunday Times, it was said that around two years ago there was a report released from CBI on what it called Britain's 'forgotten army' and said mid-market companies had the potential to inject £20bn - £50bn into the economy by 2020. This is why new plans need to be set for SME's to receive the right amount of funding to be successful in order to ultimately improve and grow our economy, instead of paying vast sums of money to bankers who are 'good at what they do'.