UK Bankers Bonus Cap Removal
In 2023, the UK witnessed a significant regulatory change with the removal of the cap on bankers’ bonuses. Originally introduced as part of the post-2008 financial reforms to curb excessive risk-taking, the bonus cap faced criticism for allegedly hindering the global competitiveness of UK banks. This shift marks a pivotal moment in the financial sector, with both opportunities and challenges for stakeholders to navigate.

In November 2024, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) initiated a joint consultation aimed at simplifying guidelines under the new regime. Key proposals included reducing the bonus deferral period and permitting dividend payments on deferred bonuses to be made in shares. These changes aim to enhance alignment between compensation practices and performance, potentially fostering a more dynamic and competitive financial services sector.

While the maximum ratio of variable remuneration to fixed pay remains in place, the removal of the cap has sparked debates about its potential consequences. Proponents argue that it may help UK banks attract and retain top talent by allowing them to offer more competitive compensation packages. However, critics highlight concerns about increased risk-taking and emphasize the need for robust governance mechanisms to mitigate potential negative outcomes. Banks now face the dual challenge of incentivizing performance while safeguarding financial stability and public trust.

Highest paid banking CEOs across US, Europe, and the UK 2023

Competitive Landscape

To evaluate the UK banking sector’s competitiveness, it is best to compare it with other regional markets. An analysis of the 2023 CEO compensation at the top banks by market capitalization in the US, Europe, and the UK reveals a significant disparity. The salary levels of UK banking executives lag behind their counterparts, supporting the argument for higher pay to enhance the sector’s global competitiveness. It is worth noting that the incomplete data limits the ability to draw definitive conclusions.

Market Impact so far

The regulatory change has prompted swift responses from leading financial institutions. Barclays, HSBC, and Lloyds Banking Group, for instance, submitted proposals at their 2024 Annual General Meetings (AGMs) seeking shareholder approval to set flexible ratios of variable pay to fixed pay for Material Risk Takers (MRTs). These proposals aim to encourage higher performance standards by linking variable pay more closely to performance metrics.

Such changes would grant remuneration committees greater flexibility to adjust compensation structures without adhering to previous limits. However, material shifts in pay practices, especially in terms of quantum, are unlikely to occur before the next remuneration policy cycle, with most FTSE All-Share companies scheduled to present their policies at their 2026 AGMs. Investor sentiment regarding significant salary increases is expected to remain cautious, with shareholder value alignment being a critical prerequisite for support. This regulatory change should be viewed as a step towards bridging the gap in salary competitiveness between the UK and other regions.

AGM and Corporate Governance Landscape Considerations

Ultimately, strong corporate governance will continue to be a decisive factor in securing shareholder support for changes to remuneration frameworks. The removal of the bonus cap is likely to amplify investor and proxy advisor scrutiny, particularly given remuneration’s status as one of the most scrutinized AGM agenda items.

Institutional Shareholder Services (ISS) and Glass Lewis have already acknowledged the development in their recent reports, signalling its potential inclusion in future voting guidelines. This underscores the heightened attention issuers should anticipate in upcoming policy discussions.

Preparing for Change

UK banks must proactively engage with stakeholders to address emerging concerns. Key investor questions may include:

• Does the company plan to implement changes to its remuneration policy at the next vote?
• Without the fixed-to-variable compensation ratio requirement, what alternative ratio will the company adopt?
• Will the bonus deferral period for MRTs be reduced?
• How will performance metrics be adjusted to align with strategic goals?
• What implications will change to executive compensation have for the wider workforce?

To address these queries effectively, issuers are encouraged to consult their top institutional investors and relevant proxy advisors. Alliance Advisors’ corporate advisory services can facilitate the identification of key stakeholders and support meaningful engagement.

In conclusion, the removal of the UK bankers’ bonus cap represents a transformative shift in financial governance, offering both opportunities and challenges. By maintaining a focus on robust governance and proactive stakeholder engagement, UK banks can navigate this new landscape while fostering competitiveness and maintaining public trust.

¹ https://www.bloomberg.com/news/articles/2024-01-18/jpmorgan-lifts-ceo-jamie-dimon-s-pay-to-36-million-for-2023
² https://www.bloomberg.com/news/articles/2024-02-02/bank-of-america-cuts-moynihan-pay-3-to-29-million-for-2023
³ https://www.bankingdive.com/news/ubs-sergio-ermotti-top-paid-europe-bank-ceo-botin-quinn-credit-suisse-bonus-pool/711655/
⁴ https://www.bankingdive.com/news/ubs-sergio-ermotti-top-paid-europe-bank-ceo-botin-quinn-credit-suisse-bonus-pool/711655/
⁵https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/ubs-boss-ermotti-becomes-top-earning-european-bank-ceo-in-2023-81933245
⁶ https://www.bankingdive.com/news/ubs-sergio-ermotti-top-paid-europe-bank-ceo-botin-quinn-credit-suisse-bonus-pool/711655
⁷https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/ubs-boss-ermotti-becomes-top-earning-european-bank-ceo-in-2023-81933245