Bonus cap removal to boost UK banks' competitiveness, resilience in crises

UK regulators' lifting of an EU-inherited cap on bankers' bonuses is expected to make Britain's financial sector more attractive for global talent and strengthen its ability to weather downturns.

The cap, limiting bonuses to 200% of a banker's salary, was introduced in 2014 as part of EU reforms aimed at preventing excessive risk-taking by banks in the wake of the 2008 global financial crisis. Britain's regulators removed the cap from Oct. 31, saying it had not contributed to strengthening banks' performance and had increased fixed costs in the sector.

Total remuneration for CEOs and CFOs at the largest UK banks — HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC and NatWest Group PLC — was higher than that of counterparts at EU-based banks in 2022 but much lower than at US-based peers, which do not have a cap, S&P Global Market Intelligence data shows.

The CEOs of NatWest, Lloyds, Barclays and HSBC received bonuses of between $775,000 and $2.64 million, representing 57% to 165% of annual salary. The CEOs of US groups JPMorgan Chase & Co. and Citigroup Inc. received bonuses of $5 million and $3.45 million, or roughly 330% and 230% of salary, respectively, but their salaries were lower than those of their HSBC and Barclays counterparts.

Lower bonuses, higher base salaries

Since the cap does not limit total remuneration, it can place upward pressure on salaries and allowances that may not be linked to longer-term performance and cannot be reduced or clawed back later, the Prudential Regulatory Authority and the Financial Conduct Authority said Oct. 24.

Having a larger part of total remuneration that is fixed rather than variable limits banks' flexibility to adjust their cost base to adverse changes in economic conditions, they said. Evidence that emerged in recent years suggests the cap has had "undesired consequences" on firms' safety and soundness and UK competitiveness, the authorities noted.

UK bank bosses have previously said the bonus cap impacts their ability to woo high-performing talent and has affected London's standing as a global financial center following Brexit. The cap removal will help "make the UK a more attractive place to work for international professionals," trade association UK Finance said recently.

Yet the removal of the cap could fuel a "greed is good" culture in the financial sector at a time when others are contending with a cost-of-living crisis, Paul Nowak, head of the UK's Trades Union Congress, told The Guardian. The changes may also cause trouble for banks as employees may push back against a basic salary reduction in exchange for a higher bonus, London-based recruiter Ruksana Uddin and Pinsent Masons law firm partner Anne Sammon told BBC News.

HSBC, Barclays, Lloyds and NatWest did not respond to requests for comment from Market Intelligence.

CFOs

CFO bonuses also differ widely between UK and US banks. In 2022, the CFOs of Barclays, Lloyds and NatWest received bonuses worth 68%, 84% and 55% of their annual salary, respectively, compared to bonuses of 600%, 520% and 380% of their salary for the CFOs of JPMorgan, Citi and Bank of America Corp.

The bonus of HSBC CFO Ewen Stevenson surpassed 200% of annual salary due to severance payments when he left the bank in April 2022.

– Access compensation details for executives at HSBC, Barclays, Lloyds and NatWest. – Access UK bank aggregate financial highlights on S&P Capital IQ Pro.

Executives' bonuses at EU-based banks ranged from 8% to 22% of annual salary, with the exception of the CEO of French group BNP Paribas SA, whose bonus for 2022 was 104% of annual salary, Market Intelligence data shows.

The number of high earners at UK banks — those making €1 million or more per year — remained above that of peers in continental Europe for at least a decade, according to European Banking Authority data. The EBA stopped tracking UK banks after Brexit.