Germany chancellor Angela Merkel is backing French president Nicolas Sarkozy’s plan to curb executive bonuses at next month’s G20 summit.  The EU is finalizing a plan to implement similar rules among its member states.


European Commissioner for Enterprise and Industry Günter Verheugen tells Hamburger Abendblatt that there should be “no direct relation with a company’s short-term profits” and the compensation of its executives.  He supports high taxation rates on bonuses, especially for employees of banks receiving state support.  At the same time, however, the new legislation would reduce bonuses for banks that perform poorly.


France, in particular, has joined Germany as one of the countries trying to impose the toughest restrictions on executive compensation. On Tuesday, French President Nicolas Sarkozy announced that Paris will impose strict controls on the bonuses banks pay to their employees. Following a meeting with France’s leading bankers and the French Banking Federation, Sarkozy said that bank employees should also be held accountable for poor performance by having their bonus payments reduced.

Sarkozy stressed, however, that the system would only work if it were implemented on the international stage. “Everyone understands that these limits can only be international,” Sarkozy said. “If we just decided to limit them to France, everyone would leave.” Sarkozy is pushing for an international agreement on the issue at the Group of 20 meeting of industrialized and developing countries to be held in Pittsburg on Sept. 24-25.

France’s plan calls for Michel Camdessus, the former managing director of the International Monetary Fund (IMF), to review the bonuses paid out to stockbrokers and, in particular, those on a list of the 100 highest-paid traders at each French bank. In the future, a large part of bonus payments will be withheld and paid out over three years. The system also envisions a “malus” element, which would penalize traders by reducing the amount of the withheld bonus for investments that turned out to be money-losers.

WSJ‘s David Gauthier-Villars describes that plan in more detail:

Under the new rules, traders can’t receive more than one-third of a bonus in the first year. The balance will be staggered over the next two years. If the trader’s department loses money during that time, traders could lose up to two-thirds of the bonus. A third of the last two years’ payment must be in shares.

French banks also will have to disclose how they calculate bonuses in an addendum to their annual report. In-house remuneration committees, which traditionally oversee only the pay of top executives, will have to supervise bonus policy, rather than often leaving the details to trading-room managers.

FT‘s Ben Hall and Bertrand Benoit report Merkel saying, “Bonuses will be a central issue (at the summit) because it is irritating that some banks are continuing almost exactly as in the past.” She and Sarkozy will meet in Berlin Monday in preparation for the summit.

Mr Sarkozy continued to press the issue on Wednesday, saying France was prepared to go further and would raise the idea of a straightforward limit on bonuses. “I don’t see why this question should be taboo in Pittsburgh,” he said in a speech, calling for a reformed system of global governance. “If there are opposing views, I am sure they will be defended with talent. The world will judge.”

Berlin has not spelt out how it is proposing to limit bonuses at the international level, but it has expressed interest in Mr Sarkozy’s proposals. There was “considerable sympathy and support” for the French model in Germany, Peer Steinbrück, finance minister, said on Wednesday.

Naturally, Sarkozy welcomes the support. He declared, “The responsibilities of states are a direct function of their weight,” he said. “The stronger you are in Europe, the bigger your responsibilities.”

The weightiest of the states in attendance in Pittsburgh, the host United States, will naturally be a stumbling block to such a proposal, although President Obama and the Democratic Congress, emboldened by the global financial crisis, will be much more sympathetic to such proposals than would ordinarily be the case.

The Spiegel report notes that even French bankers have expressed support for such a plan — but only if it is adopted worldwide.  And even die-hard capitalists have often voiced frustration over a system that encourages managers to look toward short-term profits — the quarterly stock reports — rather than the long-term growth of the company.  Further, the old system seemed to ensure executives received lavish salaries, win or lose.  And bankers are an especially easy political target in the current climate.

Still, it’s quite difficult to justify punishing executives for poor performance and yet cap their rewards for good performance.

Beyond that, as Andrew Ross Sorkin points out in today’s NYT, the motivation behind the push to expand the French rules to the G20 is rather transparent:

France and Germany, which has also recently announce steps to curb bonuses, fear that regulators in the United States and Britain are taking a lighter approach. They worry that their financial sectors will lose talent if there is an easier environment abroad.

So, the Sarkoszy-Merkel plan amounts to rent seeking at a global level. They’ve pushed for politically popular legislation at home and fear that other states will not follow suit and put their countries at a disadvantage.  That doesn’t necessarily make it a bad idea, of course, but it’s worth remembering amidst the flowery rhetoric.

James Joyner is managing editor of the Atlantic Council. 

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