How to create a liberal economy, tackle bonuses and differentiate in a time of austerity

All parties are fighting it out over who is in touch with the public more when it comes to the economy. While the rhetoric is flying around it seems to be business as usual in the City with a proposal for $1.3m bonus for RBS chief; making it an easy target for Miliband to attack the Coalition. What we need to move from is a position of rhetoric to one of principle in action. While there is no action on bonuses, we will see case by case arguments between the parties, such as this one involving RBS. It would save a lot of trouble if we came out with concrete proposals for the whole system by which we can assess each case while at the same time distinguish between us and everyone else.

Clegg’s recent speech on the economy was good in many respects and begins a conversation about they type of economy/business we want in the UK. However, there are two issues with it. One is that it did not define what purpose we want a corporation to have in the economy in the first place. Miliband tried it with limited success (anything based on good/bad is surely too vague to have real meaning). The second is that having employees on boards and owning shares won’t necessarily change the way the corporation operates. The Harvard Business Review helpfully sets out what they would consider to be a good model for the purpose of corporations which may be helpful for the party:

the purposes of the corporation today are threefold: creation of durable value for shareholders and stakeholders through sustained economic performance; sound risk management; and high integrity

Clearly this is not the case with RBS and hence the rise in anger over their recent proposal. The petition to call on Osborne to block RBS’s bonuses also includes banning RBS on lobbying the Government (see here).  Harvard Business Review believes that Governments should establish and publicise substantive measures of economic performance beyond stock price of corporations, their risk management and how they promote integrity which should guide, justify, and constrain future executive compensation. This would also provide a bigger benefit for all those employees who become shareholders than would currently.

While this would be a good move there are other moves which could also be added which would be simple and effective in communicating our position thanks to Tax Research UK:

• A ‘top to bottom’ pay ratio
• Ban all corporate tax relief on salary and remuneration packages over £250,000, increasing the cost of paying them and removing taxpayer subsidy from high pay
• Ban incentives that relate to post tax cash flow earnings that have the effect of encouraging tax avoidance by multinational corporations. These have explained the boom in tax abuse
• Ban bonuses, however earned, of more than 100% basic pay (itself pegged by an earnings ratio cap) by applying a 100% tax on all bonuses

Such moves would set out a clear position by which we can differentiate from other parties at the same time as being clear and consistent in our criticism of bonuses and business culture.