The bankers’ bonus cap has been scrapped in the UK from 31 October 2023 as a post-Brexit measure reportedly designed to liberalise City pay and boost the competitiveness of the UK as a financial centre.

First introduced by the European Union in 2014 in response to the 2008 financial crisis, the cap limited bonuses to twice employees’ basic salary. Yet it was unpopular with both the UK financial regulator on the one hand, and employer banks and ambitious bankers on the other.

Banks adapted to the cap by increasing fixed pay through the use of role-based allowances: this meant the overall size of remuneration packages remained similar but compensation became more predictable as a higher portion was now fixed and paid by way of salary and role-based allowance.

A small number may have lost out because, but for the cap, their bonus would have been even higher. Many bankers have been happy with the relative security of higher fixed pay, all the more so as bonuses above a certain level are now subject to deferral. They may be clawed back through malus, which is a feature of a remuneration arrangement that reduces the amount of a deferred bonus so that the payout is less than the bonus award, and clawback, which can apply for up to 12 years after the bonus was earned.

While much has been made in the media of the cap lift, heralding the return to a Gordon gecko style era of banker pay, it would be wrong to imagine this will be the case. Banks are now subject to other constraints on pay, in particular the Remuneration Code, which requires pay policies to take account of a number of principles such as risk management, supporting business strategy, objectives, values and long-term interests of the firm, avoiding conflicts of interest and governance.

In the near term, remuneration budgets for this year have already been largely spent on fixed pay. There may be a small number of employees who are awarded a bonus above the cap at the expense of their colleagues who share in the same bonus pool, however, they will likely very much be the exception.

Going forward, the cap lift may have more of an effect, but it will still be relatively limited. Where role-based allowances are discretionary these may be withdrawn by the employer bank unilaterally but in most cases they will be contractual. Will the banks seek to change contracts of employment to reduce fixed pay? Doing this will generally require bankers’ consent, but the question is, what can the banks offer them to buy out their guaranteed fixed pay?

We may well see different contracts introduced for new joiners from now on, or those accepting promotions, which allow for a different balance between fixed and variable pay but, again, the malus and clawback regime may apply. For the majority, we are more likely to see evolution rather than revolution in bankers’ pay as a result of the bonus cap measure.

This article first featured in Employee Benefits in November 2023.