It isn't just bankers' bonuses - it's ALL bonuses

The European Union's financial services commissioner Michel Barnier has warned of the UK's isolation on the issue of bankers' bonuses.  It is true that, of all the aspects of Europe that annoys the Conservatives, it is this issue which has taken George Osborne to the European Court of Justice.

But the real problem isn't really capping bonuses - though that may have been the most possible of all the political alternatives - but of paying bonuses at all.  And not just bonuses to bankers, but bonuses to pubic service managers and everyone else.

I say this partly because of my scepticism about reducing complex tasks to simple numbers, but also because of reading Michael Lewis' classic The Big Short.

This book is destined to become the non-fiction classic of the sub-prime crisis, following the handful of traders and financiers on Wall Street who could see what was about to happen.

At every level, in the disaster that destroyed the world's banks, the behaviour of staff was dominated by bonuses related to narrow targets.

The mortgage sales teams were only interested in how many mortgages they could sell, not whether they could ever be repaid. The bond departments were only interested in packaging up new bonds, packed with mortgage debt, rather than whether or not the debts were sound.

Even the ratings agencies were dominated by targets, by how much they could earn from the bond departments, rather than whether the bonds were accurately rated.

And here's the problem: bonuses over-simplify jobs, sometimes disastrously.  Just like targets, bonuses persuade people to focus on reaching simplified numerical targets which can't possibly sum up the complexity of the broad objectives they really need to strive for.

They are also easy to game.  Like targets, bonuses narrow complex objectives down to impoverished output figures.  They sacrifice broad improvement for narrow outputs. You might as well replace highly paid human beings with extremely expensive machines (hence the picture above).

They also fall foul of Goodhart's Law (when numbers are used for control purposes those figures will always be inaccurate).

So, yes I would cap them.  It would reduce house price inflation in London, which is exacerbated by bank bonuses.  But I would go further: I would tax all bonuses at 90 per cent.

All bonuses boulderise and subvert.  Everybody's.  Our companies would be better managed as a result and so would our services.