Key takeaways 

Firms can now reevaluate their remuneration policies and allow for the payment of bonuses that exceed the previous cap.

However, firms still need to frame their remuneration policies in such a way that there is an appropriate balance between fixed and variable remuneration.

In more detail 

The "Bankers Bonus Cap" colloquially refers to the maximum ratio between fixed and variable components of remuneration for top employees of banks, building societies and PRA-designated investment firms. It was imposed across the EU following the 2008 global financial crisis. The current cap is 100% of fixed pay (or 200% with shareholder approval).

The short-lived government of Liz Truss announced its plan to remove the cap for the UK in October 2022, and the Sunak government subsequently confirmed the proposal. Following a period of consultation, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have now announced that the cap will be removed for a firm's performance year that is ongoing on 31 October 2023 and for future years. In short, there will no longer be a maximum ratio between fixed and variable components of remuneration.

The removal of the bonus cap is the only change being made at this time. Importantly, other remuneration rules remain. Firms must continue to set an appropriate ratio between fixed and variable components of total remuneration.  The level of the fixed remuneration must be such that does not stop the possibility of firms not paying out the variable remuneration.  In addition, a sizable portion of bonuses must still be deferred and a minimum of 50% of this deferred compensation must still be settled in shares, which would be tied to the longer-term performance of the employer.  The ability to reduce or claw back variable remuneration in designated circumstances must continue to be applied. 

The 31 October implementation date is earlier than originally proposed. The FCA and PRA have explained the change as giving firms flexibility in determining when to make changes to remuneration structures. If a firm chooses to make changes to remuneration policies in this current performance year, it does not need to re-submit its remuneration policy statement for the year if it has already done so before 24 October 2023.

The government's stated intention in removing the cap is to boost the UK's competitiveness as a global financial centre by enabling firms based in the UK to offer recruitment packages which are competitive with the packages available in non-EU financial centres. Time will tell whether this goal is achieved. In the meantime, in practical terms, firms should consider:

• Whether to allow for bonuses and other variable remuneration to exceed the previous pay caps.
• The impact of larger bonuses on the appropriateness of ratios between fixed and variable components of total remuneration
• Whether changes should and can be made to existing compensation ratios by reducing fixed remuneration (perhaps by removing role based allowances) in preference for greater discretionary, variable bonuses. If this is desired, how can changes to individual remuneration packages be achieved? In particular, fixed remuneration is likely to be a contractual entitlement, meaning that unilateral reduction might not be possible.
• Whether to introduce new remuneration policies solely for new joiners.
• Whether there are any employee relations difficulties, or equal pay or discrimination risks, arising from new remuneration policies.