Ritika Janiya
Barclays has become the first bank in the UK to abolish its cap on banker bonuses. Bonuses, previously restricted to twice salary, can now go as high as 10 times salary. Staff has been informed of the move through an internal memo circulating within, which is understood to be a new incentive to attract and retain the best talent but has received mixed reactions.
In a surprise move, Barclays is going to fundamentally change how much bankers can earn in bonuses. The bank has just become the first in the UK to abolish caps put in place by the European Union on these kinds of bonuses. The previous rule limited banks to paying no more than twice the banker’s salary in bonuses. Under this new change, it could be ten times their salary!
The update was shared with Barclays staff in an internal memo on Thursday. It came four months after the bank’s shareholders voted to scrap this cap at their annual general meeting. The change brings Barclays more in line with US rivals like JP Morgan that never operated under such a cap.
It is part of the broader trend for UK banks, whereby other major lenders such as Lloyds and HSBC are in the process of scrapping this cap. The EU enforced these limits on bonuses following the financial crisis of 2007-08, with an intention to prevent some risky behavior by bankers, which was considered to have caused the crisis. The intention was to discourage bankers from reaching out to short-term profits at the expense of long-term stability.
However, the UK regulators scrapped these restrictions last year. There have been sustained complaints from many UK politicians and regulators that the bonus cap makes it harder for banks to recruit skilled workers. Indeed, they argue that the best talent will simply go to work in New York, Singapore, or Zurich instead. Former UK Chancellor George Osborne even tried to annul the rules concerning the bonus cap back in 2014. His attempt did not succeed.
The latest move to scrap the bonus cap was first announced in September 2022 as part of a mini-budget presented by the Liz Truss-led government. Although the announcement was made by then Chancellor Kwasi Kwarteng, responses to the move varied before it was passed into law by the next Chancellor, Jeremy Hunt, and financial regulators in the UK, such as the Bank of England.
Even after removing the cap on bonuses, Barclays has made it clear that the change does not mean that every banker will receive a mammoth bonus. The bank’s spokesperson said that the bonuses still are performance-driven and would depend on the market condition also. In the memo, it is mentioned that this revised cap would not impact overall expectations about compensation, but it would certainly give more room for flexibility in terms of rewarding performance at the individual level.
The new policy is aimed at assisting Barclays in attracting and retaining the best talent available in a highly competitive market. Basically, it hopes to utilize the flexibility for recognizing outstanding performance while remaining competitive in the global financial market. On the other hand, Barclays said that it would still keep very close to the overall group performance regarding the way it sets bonuses, and this would not be drastically affected by the new cap.
The original cap had been aimed at curbing the bonus culture, which most people felt had contributed to the financial crisis. Limiting how much bankers could earn in bonuses, it was hoped, would reduce their incentive for taking excessive risks. Now that the cap has been swept away, some fear it will invite risky behavior once more, while Barclays maintains that the new system will be closely managed.
This will be an interesting change to watch. Although Barclays has been leading in changing this, no one really knows how others within the United Kingdom banking sector will respond to this initiative. The decision reflects a shift in attitude among financial groups over what is the right balance between rewarding staff and limiting risk.
This means Barclays’ decision to lift the bonus cap could come as an important change in banking. In a bid to be more competitive, Barclays raises the possibility of bonuses reaching up to ten times a banker’s salary. While many hail the move, it also questions what its possible implications might be for risk-taking behavior and future bonus regulation in the UK.
