UK banks take first steps towards boosting bonuses after watchdogs scrapped cap

UK banks are cautiously paving the way to awarding bigger bonuses after the financial watchdogs scrapped the cap on variable pay last year.

The Prudential Regulation Authority and Financial Conduct Authority announced last October that they would remove the requirement for banks to cap variable pay at 100 per cent of base salary for so-called material risk-takers, or up to 200 per cent with shareholder approval.

The cap was introduced in 2014 by the EU as part of efforts to limit excessive risk-taking following the 2008 financial crisis.

Adrian Crawford, a partner focusing on City employment at law firm Kingsley Napley, told City A.M. that banks were “generally being cautious” about the lifting of the cap.

“I would expect them to take advantage of it to reward a small number of very high performers, but there are several reasons why they are not going back to the approach they adopted before the bonus cap was introduced,” he said.

Banks still face other measures to ensure their pay policies do not reward risk-taking, including the FCA’s remuneration code.

Big banks responded to the bonus cap with so-called role-based allowances – de facto bonuses that gave bankers a higher proportion of fixed pay.

Crawford said many bankers preferred this system, which gave “greater certainty about their level of earnings”.

He added: “This means that, in terms of attracting and retaining talent, moving back to relatively low fixed pay and higher bonuses may not give them any competitive advantage.”

Barclays said in its annual report last week that it would keep its 2:1 cap for last year given that “the new regulations were published close to the end of 2023” and consider the matter further for 2024 and beyond.

“A relatively small number of our employees are potentially impacted by this regulatory change,” the bank said, with its executive directors’ maximum variable pay governed by a separate policy.

However, Natwest has raised its cap to 2:1 from 1:1, which it said should align the bank “more closely to peers, ensuring we have the flexibility to remain competitive”. It made no changes to executive directors’ bonuses.

Dame Carolyn Fairbairn, chair of HSBC’s remuneration committee, said in the group’s annual report that it would seek shareholder approval to set an “appropriate” ratio increasing variable pay.

“It will also strengthen our ability to recruit and retain people in competitive markets where many of our international competitors do not have similar restrictions,” she added.

HSBC chief executive Noel Quinn has flagged the potential for more risk-taking after the cap was scrapped.

“I’m not a fan of just unleashing inappropriate amounts of risk-taking,” he said in December, calling for the industry to “remain sensible”.

It was reported over the weekend that the bank was consulting shareholders about introducing Wall Street-style bonuses for its top brass to compete with US pay levels.

Lloyds made no mention of the cap in its annual report last week.

Santander executive chair Ana Botín said at a Financial Times conference last November that scrapping the cap would more closely align the interests of bankers and their shareholders.

Christian Sewing, chief executive of Deutsche Bank, added that the EU should consider scrapping the cap as the region’s banks were now operating on an “unlevel playing field” for attracting talent.

CEO pay

Banks are also being cautious when it comes to CEO pay, despite most seeing a surge in annual profits last year.

Quinn was the only one of the Big Four bosses to see a pay rise, with his remuneration nearly doubling to £10.6m for 2023.

Barclays boss CS Venkatakrishnan saw his pay package drop to £4.6m from £5.2m year-on-year, while Lloyds’ Charlie Nunn’s pay ticked down two per cent to £3.7m.

Natwest has appointed Paul Thwaite as its new permanent chief executive, with a base salary of £1.2m.