The bankers are bluffing, don’t scrap the bonus cap

There's no shortage of people wanting to be senior bankers.

Luke Hildyard is Director of the High Pay Centre.

The Financial Times reported this week that the Government is considering scrapping the cap on bankers’ bonuses as, following Brexit, the UK begins its divergence from EU financial services regulation.

Amidst vast regional inequality and the acute threat of unemployment, evictions, poverty and pressure on public services resulting from the coronavirus crisis, lifting curbs on the pay of already super-rich bankers almost entirely concentrated in the South East of England feels like a curious policy priority.

But it’s important to be clear about how the cap applies. 

The European Banking Authority’s most recent figures on high earners at EU banks (including the UK) shows that pay for so-called ‘identified staff’ (the senior ‘risk takers), average pay rose from €360k in 2012 prior to the introduction of the bonus cap to €420k in 2018 – a minimal increase bearing in mind the spectacular payrises bankers enjoyed in the 1990s and 2000s. Bonuses declined from 109% of salary to 62%. 

At the same time, the number of ‘identified staff’ increased over the same period by about 30%, meaning the increase in aggregate pay for top bankers was more marked than the average. Logically, this also suggests that there were more people engaged in risk-taking activities, albeit with a lower proportion of their pay based on bonuses that might encourage excess risk-taking.

The figures suggest that the bonus cap has had a very modest positive effect, in terms of containing bankers’ pay and excessive risk. This latter point is supported by the conclusions of a Bank of England working paper which found that “some appropriately designed restrictions on bonus payments could mitigate excessive risk-taking.”

The banks argument in favour of removing the cap centre around the claim that it prevents them from attracting and retaining high performing staff.

In interrogating this claim, it’s worth reflecting on the work that bankers’ do and who bears the ultimate cost of their pay.

Banks provide a vast range of services that vary considerably in terms of their value to wider society (the economist Adair Turner famously suggested that much of the financial services industry was engaged in ‘socially useless’ activity). 

For complex work that serves the needs of the real economy, it’s undoubtedly important to have competent people in post and paying a premium to attract the right candidates may be necessary.

At the same time, the fees charged for work helping a major employer access credit, protect themselves from currency fluctuations or agree a merger that will improve the efficiency of the business are largely driven by the colossal pay expectations of senior bankers – staff costs form the biggest element of expenditure in the banking industry.

In other words, very high bankers’ pay has consequences for the cost of access to banking services.

Similarly, the opportunity costs of top pay must be considered. Barclays published their 2020 annual report this week showing a bonus pool of £1.6 billion. They contrasts with the £1 billion paid to shareholders in 2019. 

Barclays also had 448 employees paid over £1 million and 27,000 paid less than £25k. Redistributing some of the wealth accruing to top earners to shareholders or low-paid employees, could result in materially better outcomes for the latter groups, while the former would remain extraordinarily well-rewarded by the standards of wider society.

If this could not be achieved without compromising the competence of key banking staff, that reflects very badly on the banking industry’s training and development processes, rather than on the notion of capping bankers’ pay. 

People are not born with an innate capacity to perform banking services. It is incumbent on the industry to equip them with the necessary skills. 

Given that the average pay level for a senior banker implied by the EBA figures is more than double what even the top 1% of earners in the UK make, there is unlikely to be a shortage of candidates to assume these roles, even at a much-reduced rate.

If banks were really concerned about recruitment and retention risk they’d have done a much better job of expanding the pool of people capable of filling key roles – and thereby reducing one of their biggest costs. The fact they have obviously not done so represents a failure to their wider employee population, their customers and their shareholders. 

It shows that we should not only keep the cap, but think about further ways to tackle bankers’ excess pay.

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