What was the cap on bankers' bonuses and why has it been lifted?

The Chancellor’s decision to axe the cap on bankers’ bonuses has been met with criticism (Ian West/ PA) (PA Archive)
The Chancellor’s decision to axe the cap on bankers’ bonuses has been met with criticism (Ian West/ PA) (PA Archive)

Bankers have today (31 October) seen a cap on their bonuses lifted, after a decade of working under the rule that limited their bonuses to double their salary.

The rules which have now been scrapped were introduced by the European Union back in 2014, with the goal of avoiding another economic crisis like the one in 2008 happening again.

The hope is that the lack of limit on bonuses will motivate bankers and, thus, the economy, to overperform and grow.

However, critics including the Labour Party, have spoken out against the “out of touch” move, highlighting the financial pressures families across the country are continuing to face.

How much is a normal banker's bonus?

Before the removal of the cap, bankers’ bonuses could only be 100% of their salary.

The exact percentage was determined by the investment banking company, with factors like how long someone had been with the company coming into play. However, according to analysts, the percentage of base salary generally used to calculate year-end bonuses ranged from 70 percent to 100 percent.

In some cases, bonuses of more than 100 per cent could be awarded to top performers and more senior investment banking roles.

Now, there will be no cap on bonuses, meaning the sky is the limit.

How do banking bonuses work?

Bankers' bonuses are awarded at the end of the bank's financial year.

They are intended to reward employee behaviour during that year that has increased the profits of the bank or some relevant part of its business, as shown by the annual accounts.

Why were bankers' bonuses capped and why was the cap scrapped?

Introduced in 2014, when the UK was part of the EU, the cap was designed to curb excessive risk-taking in the financial services industry in the wake of the 2008 financial crash.

The cap limited the variable pay of employees of banks, building societies and investment firms to twice their base pay.

Finance bosses had long complained about the rules, saying they lead to higher base pay that pushes up banks' fixed costs.

The decision to scrap the cap on bankers' bonuses was subject to a consultation by the Financial Conduct Authority and the Prudential Regulation Authority (PRA), which decided that the bonus cap had “unintended consequences”.

They added that when fixed or base pay accounted for the biggest share of remuneration, employers had less room to vary employee pay due to "material poor performance or misconduct".

The cap on bonuses was lifted on Tuesday, October 31.