Banking bonus cap scrapped: here's what happens next
The EU bonus cap that restricted London bankers' bonuses to two times their salaries is being disposed of. Speaking during his "mini" budget today, UK chancellor of the exchequer Kwasi Kwarteng, said the cap - which has been in place since 2013 - will be eliminated as part of, "an ambitious package of regulatory reforms later in the autumn."
As we've noted here several times, removing the bonus cap isn't straightforwardly good news for people working in London banking jobs. As former HSBC chairman Douglas Flint observes, it's unlikely to lead to higher pay. Instead, Flint says the structure of pay will change and "base salaries will not be as inflated.”
Senior London bankers' fixed pay can currently be as high as £700k (sometimes more) when salaries and so-called "role based allowances" are taken into consideration. Now that bonuses are free to increase again, the implication is that salaries and allowances should fall.
However, cutting salaries and allowances is not as simple as it seems. Both are typically codified in employment contracts.
The European Banking Authority (EBA) tightened its guidance on the use of role-based allowances (RBAs) in 2015 to prevent banks from using them as an alternative to bonuses. If they wereto constitute fixed compensation, the EBA said allowances needed to be "predetermined, transparent to staff, permanent...tied to a specific role," and "non-revocable."
Allowances that showed any sniff of being related to performance, or that could be easily revoked, would constitute variable pay (bonuses), said the EBA.
For this reason, most banks in London now have role based allowances that they can't easily remove.
A lot of role-based allowances are "quasi-salary", says Sam Whitaker, a partner in the compensation and governance practice at law firm Shearman & Sterling. Many, although not all, are contractual, making it difficult for banks to amend or withdraw them. And renegotiating contracts is a difficult business: "You can't cut salaries without consent, and if you force someone to accept a new, lower, salary it is constructive dismissal," says Whitaker.
The harsh and risky option is for banks to offer employees amended contracts, and then to terminate positions if they won't sign.
This is impractical, though. Most senior bankers very much like their higher salaries and role based allowances, and will only accept a reduction under sufferance. "If you are on £2m total comp and your fixed pay goes from £1m to £200k you will be pissed off," says one headhunter. "It’s removing your floor."
Another headhunter points out that the bonus rules only apply to regulated staff (material risk takers) in London, and that the bureaucratic hassle of persuading them to accept lower fixed pay at a time when HR teams are also busy cutting costs, will simply not be worth the effort.
The most likely outcome, therefore, seems a slow culling of the old bankers on the old pay structure and a shift to a new pay structure, with lower salaries and higher bonuses implemented when staff swap jobs or are promoted into regulated roles. In turn, this may discourage some poorly performing senior bankers on large salaries from swapping jobs at all for fear of losing their comfortably high fixed pay. In this sense, Kwarteng's great liberalisation could lead to more sclerosis in the short term, not less.
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