Is it better to pay a reasonable basic salary and place a cap on bonus payments, or to pay a lower fixed wage with the scope to earn a much larger bonus payout? This is the question that has arisen this week following the Financial Conduct Authority’s (FCA) announcement that the cap on bankers’ bonuses will be scrapped from 31 October.
The cap, which was introduced in 2014, was intended to curb excessive risk taking in the financial services industry following the financial crash of 2008. The cap limited how much variable pay employees of banks, building societies and investment firms could receive to twice their basic salary.
The decision to remove the cap was first raised by former Chancellor Kwasi Kwarteng last year. It will now come into force, following a four-month long consultation by the Prudential Regulation Authority and the FCA. In its statement announcing the change, the FCA wrote: “The removal of the bonus cap gives firms the freedom to restructure their pay over time, within the framework of the regulators’ rules on variable remuneration, which aim to better align remuneration with prudent risk taking.”
When the cap was first introduced, it understandably had its critics. Over time, however, many employers have increased the fixed salary portion of their remuneration packages in order to remain competitive when tasked with paying out lower bonuses. This has resulted in many employees receiving a more reliable income.
So, what will the removal of the cap mean for employers’ remuneration strategies? Will we see a move back to the former model of higher bonuses, but lower basic salaries? Will this result in more risk taking by employees keen to earn large bonus payments? Not to mention, would a move to higher bonuses be viewed as the right thing to do ethically in an industry renowned for its large pay packets, given the cost-of-living crisis currently creating financial pressures for so many of the population?
Unsurprisingly, we have received a large number of views on the subject over the last few days, with mixed opinions on the extent to which this will drive change within the financial services industry.
For example, Sam Murray-Hinde, partner in Howard Kennedy’s employment practice, said: “With many banks currently going through rounds of redundancies, there is an added incentive to revert to lower basic salaries with higher bonuses for new starters to give banks better control over cash in difficult times or in cases of under-performance or conduct issues. For those bankers who had their salaries increased to offset the bonus cap, and where it’s more difficult to now vary their terms, they may see little change in the near future which could cause discontent and encourage them to jump ship. We could see more team moves and possibly satellite litigation as a result.”
Meanwhile, Dean Fuller, partner at Fox and Partners, said: “Bigger bonuses also bring the potential for more bitter and hard-fought legal disputes. The law has progressed somewhat since the cap on bonuses was introduced in 2014. Employees arguably now have more chance of successfully winning a case where they can show that their bonus is unfairly low or that they have been singled out. The legal ‘discretion’ that banks had in setting bonuses has started to be eroded over the years.
“A dispute over a bonus where the banker feels they have been discriminated against on the grounds of gender, race, religion or sexual orientation is a bombshell both legally and reputationally. Bigger variable bonuses means more potential for disputes. That’s inevitable. Banks will have to be extremely careful over how they allocate bonuses. The formula they use and how this is applied in individual cases have to stand up to scrutiny; the record-keeping of the process needs to be meticulous. All of that would be uncovered during the disclosure process of any ensuing litigation.”
While change may be gradual, it will be interesting to see what impact the removal of the bankers’ bonus cap ultimately has.