Review of The Bonus Cap Underway – Get Involved!

The amount of renumeration that any employee or member of a company receives is normally a private matter, carried out under employment legislation (Employment Rights Act 1996). In the case of large renumerations in the regulated sector, this also becomes a matter of regulatory oversight. There is an opportunity for your firm to get involved in the current consultation being conducted by the FCA to remove the existing limits on the ratio between fixed and variable renumeration.

Always a hot political issue, it is important to remember that the current ‘bonus cap’ rules were transposed from in 2014 from EU legislation (Capital Requirements Directive (2013/36/EU) – CRD IV; and Capital Requirements Directive (2019/878/EU)), as part of the [at the time] legal obligations of the UK as an EU member state. A second set of rules were implemented in December 2020, with regulators extended the remuneration regime, including the bonus cap, to a wider set of firms.

The removal of the bonus cap would have big implications for firms but will also cause ructions on the political front. On the one hand, it will make it easier for firms to adjust their variable remuneration through time to reflect their financial health. This will also make firms more competitive in the international markets, which at a time of increases barriers to trade, would have a positive impact for the standing of the City of London as an international centre of finance. The argument is that by “adjusting down variable pay in the event of a downturn, firms would have more resources that could be used to absorb losses, thereby promoting the safety and soundness and long-term viability of the firm.”.

In the view of the Bank of England “A restructure towards greater proportions of variable pay can both increase the amount to which restrictions on distributions could be applied to, and also give firms greater flexibility over how they apply the restrictions within the scope of the rules (variable remuneration, discretionary pension benefits, dividends, and shares).”. On the other hand, not everybody will understand or agree with the proposed measures.

If you want to get involved in shaping the future of remuneration policy, email: CP15_22@bankofengland.co.uk