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Upset as London bankers face removal of lucrative allowances

As we've written here before, the lifting of the EU bonus cap isn't necessarily a positive thing for bankers in London. While it might seem to permit wildly generous bonuses of the kind last seen circa 2006, it's more likely to precipitate in a dramatic drop in fixed pay and feeble bonuses until revenues recover.

In London, bankers' fixed pay is composed of two elements: salaries, plus - for senior bankers hit by the bonus cap, role-based allowances. As banks contemplate life after the cap, allowances are likely to be the first to go.

Sources say US banks like Morgan Stanley and Goldman Sachs are having preliminary internal discussions on the potential removal of allowances if the bonus cap is lifted - something that's expected to happen before the next bonus round. No decisions are understood to have been made yet, and both banks declined to comment. They are unlikely to be alone in contemplating allowances' demise, though: the issue is industry-wide. 

Allowances are paid to 'material risk-takers' (MRTs). These are typically senior bankers and traders whose total compensation would otherwise be crimped by the bonus cap, which restricts bonuses to no more than twice fixed pay. The generosity of allowances is illustrated by the case of Daniel Pinto, the CEO of JPMorgan's corporate and investment bank, who was based in London before he moved to New York in late 2021. For his final year in the UK, Pinto received a salary of £475k, a bonus of $16m, and an enormous role-based allowance of $7.6m. - His role-based allowance made his $16m bonus permissible.

If allowances are removed, London bankers will therefore be bereft of a very lucrative and assured element of their total compensation. Allowances are paid irrespective of performance. In their absence, bankers will need to perform to justify the big bonuses replacing them.

For the moment, allowances are still being paid. And regulatory and employment lawyers tell us they've seen no hard sign yet that banks are removing them. Most banks are awaiting the outcome of a consultation launched by the Bank of England in late December, which is being closed at the end of March. 

At this stage, it's not guaranteed that the bonus cap and allowances will be scrapped entirely: the consultation states that UK regulators are also considering: "setting a different (higher) limit on the maximum ratio of variable to fixed pay, retaining the bonus cap only for a subset of MRTs – for example Senior Management Functions holders (SMFs) ‑ and/or having alternate mechanisms for setting limits on the maximum ratio." However, the regulators note they have always opposed allowances, which are divorced from performance and can't be clawed back in the event of wrongdoing. And as the chart below from the Bank of England shows, it's allowances in particular that have increased in London as a result of the bonus cap.

Y-o-Y% changes in remuneration components after MRTs reach a given bonus/fixed pay bucket

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Photo by Tom Pumford on Unsplash


AUTHORSarah Butcher Global Editor

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