Navigating the removal of the Bankers Bonus cap: A fine line for banks to tread
The removal of the bonus cap last October 2023 marks a significant shift in the UK banking sector, presenting both opportunities and challenges for banks as employers. This policy change is poised to enhance London’s competitiveness on the global stage, aligning remuneration packages with those offered in major financial hubs such as New York and Tokyo. However, it also brings a host of employment law considerations that banks must navigate carefully.
Barclays was the first UK bank to axe the bonus cap, following the lead taken earlier this year by Goldman Sachs, JP Morgan and most recently Citi, with more UK banks expected to follow suit. In a recent article for The Banker, Head of Employment and Partnerships, Jo Keddie shared some brief insights for the banking sector, warning of the fine line to tread to ensure changes are implemented in a fair and compliant way.
In this article Jo provides a more comprehensive overview of the employment issues banks need to consider when removing the bonus cap, to ensure they don’t get caught out.
Enhancing Competitiveness and Talent Retention
One of the primary benefits of scrapping the bonus cap is the ability to offer more competitive remuneration packages in London and other banking hubs in the UK. We expect that it will help the City attract and retain top talent, as strong performers seek financial recognition for their contributions. With fewer restrictions on bonus amounts, London can now compete more effectively with other global banking centres, potentially drawing business back to the City from other European banking hubs.
The removal of the cap is likely to facilitate greater labour mobility. International banks can now transfer employees to UK-based roles without financial detriment, enhancing the UK’s appeal as a destination for top banking talent. Importantly, safeguards such as variable pay with deferral, malus, and clawback provisions remain in place to mitigate excessive risk-taking as the new changes come into effect across a growing number of banks in the UK.
How to fairly adjust remuneration packages
Historically, banks responded to the cap by raising base pay levels and introducing role-based allowances. With the cap’s removal, banks face the challenge of adjusting remuneration policies to allow for increased bonuses on top of already high salaries. This may involve phasing out role-based allowances in favour of a more flexible pay structure.
With these changes comes the potential for an increase in discrimination claims as employees. With “star performers” pressing for significantly increased bonuses, there is inevitably going to be others at various levels who have felt undervalued also pressing for larger bonuses and using the changes to secure better overall packages. When facing these pressures, banks are at risk of creating a two-tier workforce, with disparities between new hires and existing employees potentially leading to disharmony and resentment.
Contractual and Legal Considerations
Reducing fixed salaries to accommodate higher bonuses presents contractual and legal challenges. Banks must consult employees and ensure that the overall package is attractive to gain consent for pay reductions. Imposing changes without consent could lead to breach of contract and constructive dismissal claims.
To avoid contract claims, banks must ensure that discretionary bonus decisions are lawful, rational, and consistent. Building mechanisms into bonus policies that assess factors and KPIs rationally and reasonably is crucial. Failure to do so could result in costly and reputationally damaging claims.
Moving forward, bankers will be closely scrutinising how any discretionary elements (as opposed to more formulaic criteria) is being exercised in respect of their annual bonus. The case law we regularly relied on when examining the exercise of discretion, may well be revisited when determining whether discretion has been exercised reasonably with regard to all the circumstances or whether, instead, it was perverse and cannot be justified.
Failure to build in mechanisms to minimise these risks could well result in contract claims that are likely, due to the size of the claim, to be tested in the High Court. This inevitably is reputationally damaging, costly and is not a good use of management time. From experience, it also causes friction and morale issues internally amongst the affected workforce.
Addressing Discrimination and Equal Pay
Ensuring fairness in bonus distribution is crucial to avoid discrimination claims. Banks must justify any discrepancies in bonuses and ensure that changes to pay structures are not discriminatory. Historically, gender pay gaps in bonuses have been larger than in fixed pay, necessitating careful consideration of any changes to remuneration ratios.
Discrimination claims could arise if changes to remuneration and bonuses are perceived to be linked to protected characteristics such as age, sex, race, or religion. Such claims would be heard in Employment Tribunals, where substantial compensation and injury to feelings awards can be granted.
Trying to get the bonus ratios “right” for the different roles across banks will be important as will the need to try and justify different bonuses for different roles. For example, banks could set different ratios for different categories of employee and should then apply those ratios “equally” i.e. fairly to their employees doing the same work regardless of sex or other characteristics.
Reputational Risks
Mishandling the removal of the bonus cap could lead to reputational damage and costly claims. Banks must tread carefully, offering competitive bonus structures while ensuring fairness and legal compliance. Internal processes such as grievances should be followed to address perceived unfairness and imbalance. Remuneration policies must be carefully drafted and approved to maintain a competitive edge.
Conclusion
The removal of the bonus cap presents significant opportunities for the UK banking sector to enhance competitiveness and attract top talent. However, banks must navigate a complex landscape of employment law to implement these changes effectively. By ensuring fairness, legal compliance, and careful consideration of employee concerns, banks can successfully transition to a more flexible and competitive remuneration structure.