As you will be aware, the cap on bankers' bonuses has been lifted and, not surprisingly, it has generated a lot of discussion in employment circles about the implications for firms choosing to make changes to their remuneration policies. We’ll speak to an expert who is advising firms on that issue.
A reminder. The cap, which was set by the EU, limited the bonuses of banking staff who are ‘material risk-takers’ to 100% of their fixed pay, or 200% with shareholder approval. In practice, with the cap in place, banks resorted to increasing bankers’ base salaries as they could not adjust bonuses based on senior executives’ performance. Over time, the PRA and FCA formed the view that the cap was limiting labour mobility and competitiveness, citing the fact that bonus caps are not routinely imposed in other leading international financial centres outside the EU. What followed was a consultation exercise after which the two regulators last week issued a joint policy statement confirming the change. It took effect on 31 October, so it means there is no cap in place for the performance year, which is current on 31 October, or for future performance years.
When the news broke last week it was one of the leading stories across the media. In the HR press Personnel Today ran a story on the legal challenges ahead for HR – we’ll consider some of the points raised in that article in a moment. Bloomberg and the FT also covered it, of course, and both included comment from our own Anne Sammon. Anne told Bloomberg that lifting the cap could lead to a ‘two-tier workforce’ where new employees are paid lower salaries but with higher bonus potential. She told the FT that staff whose base pay was hiked when the bonus cap was introduced ‘will be contractually entitled to those higher salaries and so will only give those up where they are offered some incentive to do so’. So, if banks do change remuneration practices there are employment law implications which need to be considered carefully.
So what are the implications? Earlier Anne joined me by video-link to discuss some of them. First question, what about that two-tier workforce?
Anne Sammon: “So I think the challenge is, if you're a bank and you want to lower your salaries as a result of the bonus cap being abolished then, realistically, you're going to struggle to do that with your existing employee population because they'll have a contractual right to their salary. So your only option then becomes that you change the salaries for people who are coming in as a new employees and that’s where you get this risk of the two-tier workforce. I think the only way realistically to avoid it, well, there's two. One is that you just keep everybody on those higher fixed salaries and therefore you are maybe not taking advantage of the underlying rationale for these changes which, in part, was to allow banks to have lower fixed costs because they can pay higher bonuses. Or the other is that potentially you look at doing it on a more phased basis so there isn't so much of a differential between people's fixed salaries now, but maybe in 10 years’ time you've reduced those down over time. All of those things are going to depend on, partly as well, whether or not you have difficulties attracting the right people into your business when you're trying to recruit. If you're already struggling to recruit people, changing your fixed salaries to make them lower might not actually achieve the aim of encouraging talent to join you.”
Joe Glavina: “The HR press has also covered this, Anne, and Personnel Today’s article quotes a lawyer saying that bigger variable bonuses will inevitably mean a greater potential for pay disputes. Do you agree?”
Anne Sammon: “Unfortunately, yes, I think that probably is inevitable. I think the more money that is at stake, the more people are likely to fight about it. The risk with larger bonuses is that there's the opportunity for greater differentials between individuals and if those individuals feel that that's because of unfair and discriminatory treatment, they're more likely to challenge them if there's larger amounts at stake.”
Joe Glavina: “The same article quotes another lawyer saying how firms will need to be very careful how they allocate bonuses, the formula they use and how it's applied in individual cases. He says all of that will need to stand up to scrutiny and the record-keeping will need to be meticulous. Thoughts on that.”
Anne Sammon. “I’d agree completely with the record keeping point. I think the challenge for a lot of organisations is that they want to avoid creating bad paper trails and so sometimes we see organisations go the opposite way. So they will have no paper trail at all, because at least if you don't have a paper trail you can't have said the wrong thing. I think the challenge then becomes how you justify the bonuses that you're paying to anybody. So, if I was an organisation that was looking at offering potentially larger bonuses than we had done previously, I'd want to be looking at the processes for determining those bonuses, and also what checks and balances do we have in place to make sure that people aren't being discriminated against? So, I can think of one organisation, for example, where anyone who has been on maternity leave in the last three or four years is almost listed separately, so that that the HR colleagues can go through and check that they aren't being treated in a different way to their colleagues who haven't been on maternity leave.”
Joe Glavina: “You mentioned in your 5 Live interview last week the impact of malus and clawback clauses in bankers’ employment contracts. Are those clauses more important with the lifting of the cap?”
Anne Sammon: “So I think malus and clawback have to become more important because if larger amounts of bonuses are being paid - and we've yet to see whether that is actually the outcome of the bonus cap being scrapped - then in order to make sure that you're complying with your regulatory obligations, and risk adjusting things appropriately, and encouraging employees to look at long term view rather than short term gain, malus and clawback have to become of greater significance than they have done previously. I would imagine in most employment contracts the wording is probably fairly high level and therefore won't require adjustment but bonus policies are going to be challenging, potentially, and remuneration policies, because for most organisations those may contain their own caps on bonus to reflect the current bankers’ bonus cap and so you'll need to look at how you amend those. Whenever we're amending something partway through the year that becomes more challenging in terms of the risk of somebody objecting to it. Now, I wouldn't imagine that people are going to object to a bonus cap increasing but you never know in these kinds of scenarios. So, I think organisations need to look very carefully at the documents that they've got in place to see whether these changes require further amendment to those, but they also need to think about the kind of long-term view and, for listed companies, they also need to think about how their shareholders are going to react to this and ensuring that they've gone through any shareholder votes that are needed to amend remuneration policies.”
Joe Glavina: “That’s an interesting point you make about how shareholders are going to react, and likewise the public generally, because this is a sensitive issue. Do you think there is a risk to a firm’s reputation if this is not handled well?”
Anne Sammon: “I think that there are potentially huge risks for reputation. I would imagine that lots of organisations will be sitting watching what others are doing before they want to openly declare what their position is in relation to the bonus cap. Some may see it as a competitive advantage to immediately go to market and say, you know, we are disapplying any cap that we have within the organisation, we will be paying many multiples of people's salaries, but I would imagine that the vast majority of firms will be sat there thinking, we want to see how this plays out, we want to see what the reaction is from shareholders, and from the public more generally. We've already seen quite a strong adverse public reaction to this measure, particularly in light of the cost-of-living crisis, so I think a very key element of this will be around PR strategy.”
There is another risk to be aware with the lifting of the cap and that’s the risk of discrimination claims. So if you start changing remuneration structures for just part of your employee population, whether that's based on how long they've been in the firm, or some other criteria, you may create a situation where someone has an indirect discrimination claim, or potentially an equal pay claim. Anne has flagged that point in her Out-Law article - that’s ‘Equal pay claim risk from UK bankers’ bonus cap reversal, says expert’. Also, last week Anne was interviewed on Radio 5 Live’s ‘Wake Up To Money’ programme and it’s something we covered on HRNews last week - that’s ‘Cap on UK bankers' bonuses is scrapped’. We’ve put links to both the article and that programme in the transcript of this programme for you.
LINKS
- Link to HRNews programme: ‘Cap on UK bankers' bonuses is scrapped’
- Link to Out-Law article: ‘Equal pay claim risk from UK bankers’ bonus cap reversal, says expert’
