Value System Tax Laws Won't Curb Excessive Bonuses

We need rules on bank bonuses, but tax law isn’t the right vehicle to create proper incentives, writes Wolfgang Schäuble.
German Finance Minister Wolfgang Schäuble

Not every high salary is undeserved. If someone produces a groundbreaking invention or has an outstanding business idea, that person can and should earn a lot of money for it. This is widely accepted in the social market economy, it benefits the individual and also society.

Conversely, of course, not every high income benefits society. Globalization has led to a sharp rise in income opportunities for some people. Many people wonder whether enormous compensation is always justified, and whether it truly reflects extraordinary performance.

The situation isn't quite as cut-and-dried as it seems. For instance, we had aberrations in banks, which we specifically addressed. We imposed tight restrictions on the immediate payment of bonuses at those banks. It is already the case that the disbursement of at least 40 percent of employee bonuses at major banks must be extended over a period of three to five years. In fact, when it comes to the bonuses of the managing directors of banks and the next level of management, 60 percent can no longer be paid at once, and in many cases bonuses must be made contingent upon the continued success of the company in the coming years. It is already easier today than in the past to withhold bonuses that have not been paid yet in the event of misconduct or a "negative contribution to success."

The Federal Financial Supervisory Authority, or BaFin, will soon introduce further restrictions. Under the new version of the Bank Remuneration Regulation, it will also be possible for banks to demand bonuses are repaid under a clawback program. This massive tightening of bonus regulations is especially logical in the banking sector. When analyzing the causes of the financial crisis, it became clear it can take several years to identify misconduct.

 

We must ensure that both the political and economic elites retain the confidence of ordinary citizens.

 

The measures help eliminating incentives for excessive risk taking. When it came to banks, we realized that phantom profits were privatized through remuneration, while risks and subsequent losses were socialized. In these circumstances it was right to intervene.

This approach can also be applied to other sectors. We must ensure that both the political and economic elites retain the confidence of ordinary citizens. Isolated cases from the more recent past presumably achieved the opposite effect.

But is tax law the right instrument here? I am a little surprised that Economics Minister Sigmar Gabriel, who recently warned against immediately using legislation to solve every problem with internal security, is now suddenly proposing precisely this approach in other areas. It is ironic that he himself has just warned against symbolic actions and false promises, which ultimately lead to nothing but disappointed expectations on the part of citizens.

What is needed is a value system that supports the social market economy and democracy itself. Freedom needs rules and boundaries, otherwise it destroys itself. Humans are no angel. They often act for egoistic reasons. And sometimes pursues false incentives, which is why it is all the more important to set the right incentives. The underlying conditions need to be the right ones. On the other hand, we cannot and should not regulate everything in our daily lives. The social market economy, like the liberal state, depends on conditions that it cannot create and guarantee itself.

It needs a value system, gut feelings about right and wrong, and simple decency. If this doesn’t exist, we will ultimately spend our time in vain, constantly trying and failing to regulate existing shortcomings. Egoistic energy will always find new paths. The tax law is not suited for symbolic substitute performance here.

The Corporate Governance Code gives us comprehensive rules on the configuration and level of fixed and variable compensation. Publicly traded companies are required to publish their compliance with the code annually. This voluntary commitment by the German economy and the transparency regulated by law are fundamentally the right approach, because it is supported by the center of the economy and therefore expresses the attitudes of the relevant players. This corresponds to our human image of individual responsibility and freedom. The state should not be allowed to regulate every aspect of life down to the very last detail.

At the same time, we will pay very careful attention to further developments. If we discover that the system of voluntary commitment and transparency isn't working well enough, we will have to make the rules more binding. There are plenty of tools to do that.

 

The author is the German Minister of Finance. You can reach him at: gastautor@handelsblatt.com

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