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The UK's Bold Move: Scrapping the Cap on Banker Bonuses

Posted on October 2023

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In a post-Brexit environment, the UK continues to reassess its relationship with EU policies. One of the most significant changes that has captured the attention of the global financial community is the UK's decision to scrap the cap on banker bonuses inherited from the EU. This change not only symbolises a divergence from EU financial regulations but also has substantial implications for the talent pool in the banking sector.

Background

The EU introduced the bonus cap in response to the 2008 financial crisis, aiming to reduce excessive risk-taking by bankers. The cap limited banker bonuses to 100% of their salary or 200% with shareholder approval. The intention behind this was two-fold: to establish a more stable banking environment and to curb the perceived excessive rewards that might encourage reckless behaviour.

However, an unforeseen consequence of this regulation was the adaptation of financial firms in their approach to compensation. To remain competitive and ensure they retained their top talent, many financial institutions simply raised base salaries. This manoeuver effectively sidestepped the bonus cap, ensuring that total compensation packages remained attractive. While it addressed immediate concerns about talent retention, this adjustment also led to increased fixed costs for many banks, regardless of their performance.

Implications on Banking Talent

Britain's decision will significantly reshape the banking landscape, particularly concerning talent attraction and retention. Here are some potential implications:

  1. Attracting Top Talent: A Global Perspective

By eliminating this cap, London could become an even more attractive financial hub, drawing professionals from other locations, and those that left post-Brexit, as Guy Gilleard, Client Director at Selby Jennings explains:

“After Brexit we witnessed some brain drain where talent left London and relocated to European locations, such as Paris, Frankfurt, and Dublin. We are now seeing interest from some candidates wanting to relocate back to the UK for various reasons, and this news could encourage more. Maybe not necessarily due to the ability to earn bigger bonuses, but because of the signal this gives to markets about doing business in the UK after Brexit. It differentiates London from the EU and demonstrates we offer a positive business environment for the banking industry.”

  1. Retaining Existing Talent: Beyond the Money

While the allure of higher bonuses is evident, this decision also signals a broader commitment to retaining talent. It may give employees a sense that their contribution is highly valued, fostering loyalty and reducing turnover rates. Guy adds:

“For the past couple of years hedge funds have been poaching talent from banks, luring them away with very attractive compensation offers. Now if banks can compete without the cap, they may able to retain and even attract talent back from the hedge funds,”

  1. Increased Competition Among Banks: A Double-Edged Sword

The removal of the cap can lead to heightened competition among banks in the UK to offer enticing compensation packages. James Warnaby, Executive Director, Selby Jennings, explains:

“We’re not far from bonus season, and for banking MD’s who are looking to retain top performers tempted by hedge funds, this may be a well-timed change they can look to use. Whether we see a movement of base salaries dropping in response over the coming years remains to be seen, but we do not expect that to begin happening a huge amount.

“Based on market conditions this year, I doubt we will see huge bonus increases anyway, but removing the cap does make London much more competitive in the banking industry when it comes to attracting and retaining top talent.”

In summery, while this can be an advantage in attracting talent, there's a potential risk of an inflationary spiral in salaries and bonuses. Banks will need to strike a balance to remain profitable.

  1. Ethical Implications and Public Perception

While many in the banking sector will welcome the change, there could be public scrutiny over substantial bonuses, especially if linked to perceived risky behaviour. Unions have already come out and condemned the announcement as “an insult to working people. Banks will therefore need to ensure they maintain strong ethical standards and transparent practices to navigate potential public relations challenges.

Preparing for the Shift

Britain's move to discard the bonus cap is not just about numbers; it's a strategic investment in talent. By making this change, the UK becomes an even more attractive destination for both domestic and international banking professionals, as Guy says:

“There could be an impact for European headquartered banks in London because we don’t expect them to start suddenly paying London bankers considerably more than their European colleagues. Now while I’m not in the market of making predictions, it’ll be interesting to see whether these European banks change their policies, utilising bonus increases to retain talent.”

Firms will likely be revisiting their existing compensation structures to ensure they remain competitive in this changing landscape. It’s not just about the immediate bonuses but creating an environment that reflects the value placed on top-tier talent.

And, while bonuses are a crucial component of compensation, they're not the only factor that attracts or retains talent. Offering holistic benefit packages that focus on professional growth, work-life balance, and a positive workplace culture is essential, which is why open lines of communication are essential. Firms need to engage in open dialogues with employees to understand their expectations and aspirations. Fostering an environment of transparency and trust can be as valuable as the bonus itself.

Seek Expertise When Needed

If you're unsure about how to navigate these changes or are looking to secure top talent in the wake of the UK’s new stance on bonuses, don’t hesitate to seek expert advice from our experts at Selby Jennings. Our team has the insights and expertise to guide businesses through these transitions, ensuring they remain at the forefront of the industry. If you’re considering pivoting your strategy or seeking advice on attracting the best talent in this new climate, request a call back from our team. We're here to assist and ensure your firm thrives in this evolving environment.

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