The UK has scrapped an EU-era rule that limits bankers bonuses to twice their base salary.
So what? Removing the limit gives banks more room to cut costs and absorb losses and – in theory – could invigorate the City of London. But it will be tricky to implement and comes across as politically tone-deaf.
The UK’s remuneration rules were brought in after the financial crash to discourage bankers from taking too much risk. They also allow firms to clawback bonuses in cases of misconduct or poor performance. Two recent, high-profile examples include:
- Natwest, which is deciding whether to withhold a £10 million pay-off for former CEO Dame Alison Rose, who was this week found to be in breach of data protection law for discussing the bank’s closure of Nigel Farage’s account.
- Barclays, which has cancelled nearly £18 million in pay due to former CEO Jes Staley after the FCA ruled he had misled it over his relationship with Jeffrey Epstein.
“Linking remuneration to the long-term outcomes of firms was a real positive that came out of the reforms in 2014,” says Anne Sammon, partner at Pinsent and Masons. But the side-effect of reforms was to increase total pay in a sector already synonymous with jaw-dropping salaries.
Sam Woods, CEO of the Prudential Regulation Authority, told MPs in March: “The only effect of that cap has been to increase the fixed pay of bankers. As bankers come up close to the cap… in the following year, their base pay gets a boost of about 15 per cent.”
Removing the cap is also intended to tackle questions about
- Talent. In May, Julia Hoggett, CEO of the London Stock Exchange, spoke out saying that low executive pay had “hamstrung” the City’s ability to compete for talent globally. Median pay for UK CEOs rose to £3.91 million last year, but was still £70,000 short of the average packet in 2017. In contrast, CEOs at the largest US-listed companies earned an average of $22.3 million in 2022, according to Equilar.
- Performance. Banks have had a mixed week of results. Barclays unveiled disappointing investment banking figures. Standard Chartered announced a $1 billion hit from its exposure to China’s banking and property sectors. Reweighting pay towards variable elements rather than fixed should ideally promote better risk management – and returns to shareholders.
Rewriting pay rules could shift power away from bankers to banks. But it also comes with challenges.
- Legal. “There’s a real litigation risk if we start to see firms adopting different approaches to people’s pay depending on when they joined, and whether the bonus cap applied or not,” says Sammon. What employee would swap part of their guaranteed fixed salary for a conditional bonus – especially in the current climate? What shareholder would agree to let them have both? How will firms navigate the possibility of a “two tier” workforce?
- Reputational. The timing is poor. On the same day the cap is lifted – Halloween – over 100 UK councils are due to hold an emergency meeting to discuss soaring demand for temporary accommodation. A report from the Joseph Rowntree Foundation this week revealed around 3.8 million people experienced destitution in the UK last year, a third of them children. Even if it’s ultimately the government’s choice, firms should be wary not to appear too celebratory.
Banks are a significant contributor to Britain’s widening inequality. Last year, the IFS found that the average monthly pay packet in UK finance was 17 per cent higher, year on year, than the average across all sectors.
At the same time, shareholders are increasingly in revolt over executive pay. One way to pre-empt attacks is to broaden representation of remuneration committees to include those on lower salaries.
After a year of financial turmoil, more accountability in bankers’ pay is probably a good thing and bringing back uncapped bonuses could help achieve it. The next challenge for banks will be to safeguard against excess.
