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The whale in the room

Despite the predictable caterwauling from the City, or the anti-EU movement, who see this as another creeping extension of Brussels unwanted interference, shareholders should rejoice at the decision by the European Union to impose caps on bonuses paid to bankers. It returns sanity to City salaries, and the end to a form of madness that has damaged shareholder returns for the enrichement of the few.

It is not just investors in banking stocks that should breathe a sigh of relief - where banking leads, manufacturing, services and the wider market will follow. In Switzerland 68 per cent of voters backed a referendum to curb top level pay. This tide of pay protest looks set to spread across Europe and will restore the balance of corporate power from board to the owners of companies, namely shareholders. Until now shareholders have had little or no say in the lavish self-congratulatory process that is board remuneration, and boards have often responded with impunity when shareholders have voted against pay packages. This looks set to change. A binding vote on executive pay could even be introduced in the UK in October.

And so to classic literature, and a character who truly understood the power of the bonus - Captain Ahab, of Moby Dick, whose visceral desire to achieve his own private goals doomed his crew to a watery grave. It provides a cautionary tale in the warped psychology of a bonus culture.

When the Pequod - the ship Ahab captained - sets sail from a wintery Nantucket port, Captain Ahab has a problem - he is operating in a highly meritocratic system with built in risk controls that have operated successfully for years. The first is the payment system. Each man signs aboard and is paid dependent on his role, this is called a lay. The lay is a share of net profits once the ship is safely back in harbour and the goods, in this case whale oil, have been sold in the market.

The owners of the ship and its investors receive the first lays, followed by senior members of the crew. The harpooners also receive a lay larger than the rest of the crew but then given that they ride in the bow of a shallow draught boat, in metre high swells, holding an iron spear and chasing a ton of cetacean, this is not begrudged them, they often have a much shorter life expectancy and face permanent dismemberment in every chase. What this creates is a system where everyone is awarded according to their contribution, and awards are only made after investors have received their share and only in the event of a successful voyage.

The possibility of a rogue captain is also catered for. Three ships mates are chosen to ensure the safe running and return of the ship, and to keep an eye on the captain. In the case of the Pequod, the chief mate Starbuck is an unusually conscientious and qualified seaman. Ahab knows this all too well, so to pursue his own ends he has to find a way to circumvent the system. The answer is simple, offer a bonus.

As Ahab repeatedly alters the course of the ship to pursue Moby Dick, questions are asked. Starbuck is outraged, pointing out that the first business of the ship is profiting from whaling, chasing Moby Dick purely for Ahab's vengeance will cost the widows and orphans invested in the voyage. Ahab's solution is to circumvent the meritocratic system and the safeguards by fixing a gold dubloon, an ounce of gold, with an iron nail to the main-mast. The first man to see the white whale gets the gold.

In this one simple move each employee is fixated on his own personal gain. Suddenly the meritocratic system collapses and the crew ignores their personal safety in pursuit of Ahab's ends, and their own enrichment. Ahab's monomaniac madness is transmitted throughout the ship by the glimmer of gold. It is exactly the same method by which otherwise right minded and moral employees are bought to fuel a chief executive and board of directors' narrow aims of personal enrichment or reputational gain.

The tragedy is that it costs Ahab or the board of a company relatively little to purchase the acquiescence of its workforce. What a workforce hands over in return is worth far more. Once they are distracted by chasing a bonus their fate is sealed. Employees will be burning the midnight oil right up until the chief executive's ludicrous global expansion plan, backed by the board, bankrupts the company. It doesn't matter how many compliance officers and risk control directors you employ, they can all be bought as well. They are only human after all.

It is now clear there is wider public support for tougher rules. If we don't push for greater shareholder control on executive pay, or at least make the framework within which it is set work for the benefits of all stakeholders, Britain's economic ship will be doomed to the same watery fate as that of the Pequod in the monomaniac pursuit of profit.