The 'Bankers Bonus Cap' colloquially refers to the maximum ratio between fixed and variable components of remuneration, which has been imposed on top employees of banks, building societies and PRA-designated investment firms. The current limitation on bonuses, transposed from EU legislation introduced in the wake of the 2008 global financial crisis, is 100% of fixed pay (or 200% with shareholder approval). Removing this restriction would effectively allow performance incentives for these individuals to be 'uncapped'.
The Government's stated intention 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. The FCA and PRA published a joint consultation paper on 19 December 2022 to consult with the public on the proposal to scrap the cap.
The Consultation Paper notes, inter alia, that the bonus cap has resulted in "unintended" and "undesired consequences", such as placing upward pressure on fixed remuneration.
Overall, the regulators note that, while other alternatives to scrapping the bonus cap altogether had been considered, including setting a higher limit on the maximum ratio of variable to fixed pay, it was ultimately decided that the best course of action would be to scrap the cap entirely. It will be up to each firm to decide the correct ratio of variable to fixed pay within the context of the risk profile of the firm.
The PRA and FCA are insistent that, if bankers are to receive more of their remuneration through bonuses and other forms of variable pay, the variable pay elements must be subject to the other pre-existing safeguards within the remuneration framework. Importantly, firms must continue to ensure that:
- Fixed and variable components of total remuneration are appropriately balanced
- The level of the fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable remuneration component
A sizable portion of their 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 their employer. An additional protection (that is otherwise not available to fixed remuneration) is the ability to reduce or claw back amount in the event of misconduct.
The financial regulators hope to implement these proposed changes in Q2 of 2023 on a prospective basis. This means that these changes would start to apply to any performance years of an employer starting after this date (i.e., it will likely apply to performance years starting from 2024). Any employers who think they might be disproportionately disadvantaged by this proposed timing should therefore make submissions.
The public has been called on for comment on these proposals by no later than Friday 31 March 2023. Comments and queries can be addressed here.