The EU cap on bankers’ bonuses – now ditched in the UK – was misnamed because it didn’t actually limit the size of anybody’s bonus. Rather, it capped bonuses as a ratio of an individual’s fixed pay – at 1:1, or 2:1 with the approval of shareholders. The response of banks back in 2014 was entirely predictable: they simply whacked up relevant salaries to “compensate” recipients for their loss of their bonus-earning potential.
It was why the policy always smacked of headline-seeking posturing by Brussels, rather than being a serious attempt to tackle the short-term risk-taking that was deemed to have contributed to the 2007-09 financial crisis. The banks themselves were transparent about their manoeuvre. The chief executives of most big banks saw their salaries roughly doubled overnight; the extra £1m-plus annual payments were dressed up as “role-based allowances”.
The abolition of the bonus cap in the UK was virtually the only policy to survive the disastrous Liz Truss/Kwasi Kwarteng mini-budget of 2022; Jeremy Hunt didn’t reverse the reversal, and nor will the Labour government. So UK banks are now deciding how to respond.
Barclays was the first to formally lift the cap this month, giving itself freedom to pay staff up to 10 times their salaries in bonuses. The reality will probably be more complicated and slower moving for the bulk of “material risk-takers”, as the bonus brigade are known, because employment contracts cannot simply be ripped up (some high earners came to prefer a system in which more of their overall pay was guaranteed) and it is messy to run different pay systems for traders doing essentially the same job.
Yet the lines should be clearer for executive directors at the top of the banking tree because they have their own remuneration structures. In their case, the underlying principle ought to be simple: if the size of potential bonuses is to be inflated then regular salaries should be reduced. In other words, the clock should be turned back on the “role-based allowances” wheeze.
At Barclays last year, the chief executive, CS Venkatakrishnan – or Venkat as he’s known – got fixed pay of £2.85m, which was spectacularly high as a salary for a FTSE 100 boss, and overall pay of £4.64m. It would be outrageous if his bonus-earning potential were now to be ratcheted up without a corresponding cut to his guaranteed rewards.
One can take the view that all these numbers represent silly money (fair comment), but the issue is about the structure of the rewards – the balance between fixed and variable pay, and how much should be guaranteed. Barclays has two years to get this right because its current policy on boardroom pay runs until 2026. It should know that it would be completely unacceptable to hike executives’ potential bonuses while leaving salaries untouched.
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Boardroom pay in the UK, under the influence of the US, is exploding again but the position with the banks and the bonus cap is peculiar to them. Bosses cannot be seen to win twice – once when the cap was introduced and then again when it is abolished.
