Katherine Bosworth takes a look into the recent decision to lift the cap and how it may affect the British public.
Photo by: Harry Shelton
Barclays has completely lifted the EU bankers’ bonus cap introduced in 2014, making it the first UK bank to do so. Capped at twice base salary, the restriction was originally implemented to prevent risky lending behaviour. However, it was repealed in 2023 by the UK government, opening the doors to changes in policy across the banking sector.
Although Barclays is the first UK bank to remove the bonus cap for their senior employees, other non-British firms have already taken this step. American-headquartered banks JP Morgan and Goldman Sachs began boosting bonuses for their UK divisions earlier this year.
It is hoped that this move will boost the UK economy. In his 2022 Growth Plan speech, former Chancellor of the Exchequer, Kwasi Kwarteng explained, “We need global banks to create jobs here, invest here, and pay taxes here in London, not Paris, not Frankfurt, not New York.”
In addition, Kwarteng expressed that the move could help attract and retain high-performing finance professionals from abroad. With the average Wall Street bonus amounting to $176,500 , the US financial sector has much to offer bankers looking to develop their careers. By increasing the compensation offered, UK banks will be able to put forward a much more competitive deal.
Risk Management
However, this competitive edge comes with potential danger, as the bonuses reward high levels of risk-taking.
There are concerns that Barclays, and any other banks who follow suit, could start engaging in dangerous lending practices, leading to market volatility. After all, the reason for the cap’s creation in the first place was to reduce the type of daring actions that led to the 2008 global financial crisis.
The Silicon Valley banking turmoil and the Credit Suisse bailout, both in 2023, have raised concerns that history could repeat itself. In their recent report, the Basel Committee on Banking Supervision cited “fundamental shortcomings in [the] basic risk management of traditional banking risks”.
Did you know? 'Some members of Barclays staff will now earn up to 10 times their salary in variable pay, including bonuses.'
Effect on the General Public
As well as contributing to an unstable financial environment, the bonuses could increase already considerable wealth inequalities.
Organisations such as The Institute for Fiscal Studies and The Equality Trust outline that bigger bonuses for executives often correlate with stagnating salaries for lower earners. This is particularly worrying given that salaries have already been suffering for years following the cost of living crisis.
Between 2021 and 2024, the average UK salary grew by only 2.2% in real terms. Torsten Bell MP, formerly of the Resolution Foundation, explained how these stagnating salaries leave low-income individuals vulnerable to potential economic uncertainty. “Nobody who’s alive and working in the British economy today has ever seen anything like this, and the toxic combination of low growth and high inequality has left poorer households particularly exposed.”
It’s possible that any economic effects are likely to not only widen the wealth gap but also leave those at the lower end dealing with the majority of the fallout.
" There are worries that Barclays, and any other banks who follow suit, could start engaging in dangerous lending practices, leading to market volatility."
Risk vs Reward
Ultimately, it is too early to ascertain the effects of the cap removal, but Barclays is optimistic in their decision, with a spokesperson explaining that the bank will be able to reduce base salary and instead use bonuses to reward high performance.
The company and its investors are certain that this is the right decision for the bank. Reuters reports that shareholders “voted in favour of a proposal by the bank to amend the cap at its shareholder meeting this year”.
As Barclays navigates its new bonus structure, it will be interesting to see the effects that it has on the wider community—and whether other banks follow suit
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Researcher: Ellis Jackson | Editor: Harriet Newcome | Online Editor: Alison Poole
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