How does scrapping the cap on Bankers’ bonuses affect attitude towards remuneration for business leaders?

January 26, 2023

Following the UK Government’s announcement last September that the cap on bankers’ bonuses was to be removed, it is important to consider the knock-on effect this is likely to have on wider businesses and their attitude towards remuneration.

The bonus cap in question currently prevents employees of UK banks, building societies and certain investment firms from receiving a bonus of more than 200% of their annual fixed pay. So how does this cap being removed, affect businesses outside of the banking sector?

First of all, with an unlimited bonus potential, the focus within the banking industry is likely to shift more heavily towards meeting short term/ annual targets. This could in turn lead to higher levels of short-term performance for the banks themselves, but could also re-introduce higher longer-term business risks the cap was designed to guard against. Secondly, removing the cap potentially increases competition for talent. Businesses outside the banking sector may come under pressure to increase their variable annual pay to remain competitive, especially at executive level.

However, businesses other than banks may not need to be too concerned about bonus practices adopted by the banks. Removing the bonus cap may go hand in glove with more challenging performance measures to justify the additional pay. Removing the cap does not mean that all banks will be tossing money like confetti towards their employees. In many cases, total short-term remuneration may not change very much.

Increasingly, there is a range of factors, other than cash, influencing decisions about whether to join a new employer. Some individuals, particularly, in times of financial hardship, will be attracted by the benefits packages and perceived relative security offered by a bank but many will not. It is important for employers to know their market. An employer, requiring skills not needed or relevant in the banking sector will have no cause for concern whether or not there is a cap on bankers’ bonuses.

For those roles, e.g. IT or cyber security, which span a range of sectors there is already strong competition and non-banking employers might be more vulnerable. In those cases, special arrangements might be required but factors other than cash will be relevant here, too.

In conclusion, removing the cap on bankers’ bonuses is likely to encourage remuneration committees to consider their annual bonus policies for executives. Whilst it is not feasible or necessary for all non-banking businesses to be expected to offer potentially unlimited bonuses, some adjustment might be necessary. Remuneration Committees should focus on their talent markets and on all the factors which, in the round, attract individuals to their companies – and ensure their remuneration policies are tailored accordingly..

MM&K specialises in executive remuneration including annual variable pay.

For more information, please contact George Edwards.

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