Cap on bankers’ bonuses to be lifted: what does it mean for firms?

The current cap on bankers’ bonuses will be scrapped on 31 October 2023, the Prudential Regulation Authority and Financial Conduct Authority have now confirmed. Affected firms are going to have to reconsider their remuneration structures going forwards.

What’s the cap on banker’s bonuses?

Under the current rules, banks, building societies and PRA-designated investment firms must ensure that the variable pay awarded to certain individuals does not exceed 100% (or with shareholder approval 200%) of their fixed pay in any performance year.

This applies to material risk takers, that is staff whose activities potentially expose the firm to risk.

Variable pay in this context includes cash and share incentives such as bonuses (including guarantees) and long term incentives.

Fixed pay includes salary, benefits and routine allowances.

When is the cap on bankers’ bonuses being scrapped?

The change takes effect on 31 October 2023. This means that, for the performance year which is current on 31 October 2023 and for future performance years, there’s no cap in place.

How will firms react?

Although the lifting of the cap is controversial, it doesn’t mean a total lack of restraint. This is for two main reasons:

• Firms must still ensure that their remuneration policies and practices are consistent with effective risk management and that there is no gender bias.
• Firms will still be required to set an appropriate ratio between fixed and variable pay for their staff. This will need to take account of the firm’s business activities and the associated prudential and conduct risks. It will also need to reflect the individual’s role and the potential effect of their activities on the firm’s risk profile. The ratio may vary for different categories of staff and from one performance year to the next.

So, in practice, firms still need to think carefully about their remuneration structure going forwards. We don’t predict a return to the excessive risk taking practices that resulted in the 2007/08 financial crisis. That said, there’s an opportunity for firms to link a greater proportion of total remuneration to performance. Fixed pay has increased substantially since the cap was imposed. Firms can now reduce that fixed pay element, in return for potentially higher variable pay.

The regulators’ joint policy statement can be found here.