With the global economy teetering on the brink of an interest rate induced downward spiral, it might not be the best time in history to deregulate banker bonuses – but hey, a win is a win, right?
In a bid to try and boost the city of London in its post-Brexit world, the United Kingdom is doing away with a cap on banker bonuses that had been put in place by the European Union.
The rule had previously limited bonuses to double the employee’s base pay for employees of banks, Financial Times reported on Tuesday. Financial regulators in the UK had argued against the ban and current government argues it will make the city of London more competitive.
Bosses at banks didn’t like the rule to begin with, not only for obvious reasons, but also because it forced them to hike base pay to try and retain banking talent, instead of relying on incentives.
The Prudential Regulation Authority was one party, along with the Financial Conduct Authority, that helped review the rule. The PRA concluded: “Over recent years, the regulators consider that growing evidence has emerged of undesired consequences of the rules on firms’ safety and soundness and UK competitiveness.”
The PRA also argued that the cap “reduced companies’ flexibility to cut costs during a downturn,” FT wrote.
Originally instituted by the European Union, the bonus cap aimed to put an end to boundless bonuses that seemingly incentivized financial professionals to gamble with high-risk ventures, a practice criticized for contributing to the instability of the 2008-2009 global financial crisis not just in the UK, but also in the US.
In an effort to modulate these risks, the United Kingdom implemented additional regulations concerning salary and bonuses. Such regulations mandate that a fraction of bonuses be deferred over a span of years, with the provision for recouping these bonuses under certain circumstances, such as misconduct or underperformance.
In the wake of deliberations over lifting the bonus cap, UK regulators have emphasized the need for companies to strike a balance between fixed salaries and variable bonuses. The aim is to ensure that no employee becomes overly reliant on fluctuating remuneration in a way that could incite them to exceed the firm’s predefined risk tolerance.