With effect from 31 October 2023 the “bonus cap”, which previously limited the variable remuneration of certain bank staff to 100% of their fixed pay (or 200% with shareholder approval) has been abolished. The FCA and PRA in their consultation paper on this change highlighted that the removal of the cap is intended to help improve staff incentivisation as well as improve firm’s financial resilience by enabling them to more effectively cut staff costs during downturns.

The PRA and FCA have provided that, notwithstanding the removal of the “bonus cap”, firms must continue to set an appropriate ratio between the fixed and variable component of total remuneration. Fixed and variable elements should remain appropriately balanced, and the level of fixed remuneration should represent a sufficiently high proportion of the total remuneration to allow for the operation of a fully flexible policy on variable remuneration components. In determining what is an appropriate balance a firm should consider all the relevant factors including the firm’s business activities, conduct risk and the role of the individual in the firm.  A firm may set different ratios for different staff and ratios may differ from one performance period to the next.

The regulators have also highlighted that firms continue to be required to establish, implement and maintain remuneration policies, procedures and practices that are consistent with, and promote, sound and effective risk management.  This includes requirements for the remuneration to be subject to clawback provisions, be deferred, and to consist of non-cash assets such as shares which reflect the performance of the firm. It is hoped that these restrictions will help continue to disincentive the perceived risk-taking behaviours which prompted the introduction of the bonus cap in the wake of the financial crisis.

Firms who are proposing to remove the bonus cap must consider the impact of such a step.  This includes considering the level of fixed remuneration which they pay to their staff, which for many firms increased significantly during the period the bonus cap was in force.  Firms should consider:

  • How to amend the remuneration structures already in place;
  • What their strategy with regard to remuneration and what the appropriate remuneration ratio should be;
  • Whether different ratios will apply for different categories of staff; and
  • The effect on any gender pay gap reporting and discrimination and equality risks.

Thank you to Tor Walberg for his help in drafting this blog post.

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