Six scenarios for a world in which bonuses are capped as a percentage of profits

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EU finance ministers are getting exercised over bankers' pay and want to cap bonuses as a percentage of profits. This is unlikely to happen, but here's what might ensue if it did.

1) Mighty consolidation

If the compensation pool is restricted to a set percentage of profits, profitable banks will get stronger and unprofitable banks will get weaker.

"It would be a bit like the football league," says the head of HR at one US organization. "Unprofitable banks would be unable to pay while they restructured. People would leave for better payers and clients would wonder why they continued to do business with them."

2) Microscopic hiring

It would be difficult for banks to increase costs temporarily during a period of expansion. Nomura's generous, and in the short term, financially overwhelming, payments to secure ex-Lehman bankers, wouldn't have happened.

3) Evasive action

Rules are made to be manipulated.

"This would lead to a specific regulatory definition of revenue and to a specific regulatory definition of remuneration, both of which would be vulnerable to manipulation by banks," says Simon Maughan, an analyst at MF Global. "Remember that high taxes in the 1970s didn't just lead to company cars, but company suits."

"Organisations would be more creative," says Andrew Pullman, managing director of People Risk Solutions. "You can imagine a situation in which people would be encouraged to set up consultancy businesses and paid in fees that don't register as compensation."

"I've worked for institutions which had informal caps on bonuses, and people who knew the cap was going to be exceeded simply delayed booking their business until the following year," says Peter Hahn, a lecturer at Cass Business School and former MD at Citigroup.

4) Everyone leaves

"People will also move to institutions that aren't covered by the restrictions," says Hahn. "The reality is that they're not going to regulate private partnerships."

"If caps are set so low that you could earn as much doing something that doesn't keep you out of the house for 12 hours a day, people would leave banking," observes one banker.

5) Unabated envy

If envy and politics are driving calls to cap bonuses, they're not going to go away. "Even if you have a cap in place, some people will still be earning 20m," says Jon Terry, head of reward at PricewaterhouseCoopers.

6) Someone else gets the money instead

If the cap is set lower than current norms, cash allocated to compensation may even go elsewhere.

"In the eventuality that there were a cap, management would have two choices," says author and former banker Philip Augar. "They could invest more in the business in terms of longer growth, or they could return more to shareholders by means of a dividend."

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