The focus on lifting the banking bonus cap is wrong. It's deferrals & clawbacks that matter
Now that banks are responding to the British government's decision to negate the EU bonus cap, which restricted bonuses to 2x fixed pay (salaries plus allowances), by lifting bonuses, there is predictable outrage.
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The bonus cap was intended to mitigate "excessive risk-taking and greed" said the Trades Union Congress in May. Lifting it risks a return to the "bonus culture which crashed our economy;" it shows a disconnect between banks and "hard-pressed families," the TUC insisted.
Goldman Sachs is proposing to increase its London bonuses from two to up to 25x fixed pay now the cap has gone. JPMorgan and Barclays are planning an increase to 10x. Citi is planning an increase to 6x.
The bonus cap only applied to banks' material risk-takers - a slender cohort of their highest paid and most important people. Last year, there were under 2,000 of them at Goldman Sachs, JPMorgan, Citi and Bank of America combined in London. By our estimation, when the cap is lifted, bonuses at JPMorgan, for example, could conceivably go from $754k to nearly $9m for top performers.
That sounds good for the bankers concerned, but as has been noted, senior people in banks aren't universally happy about the potential to receive much larger bonuses than before. Bonuses rise and fall in line with performance. Salaries and allowances don't. If you've got school fees and a mortgage to pay, a higher proportion of pay as an erratic bonus is not ideal.
Salaries and allowances are also yours to keep and are paid on a monthly basis in cash. Bonuses are more tenuous; they are both deferred and can be clawed back.
It's these deferrals and clawbacks that are most effective at curtailing risk taking. And while small firms are being given some leniency as of 2024, big banks are not.
This matters. When the bonus cap was introduced, it was accompanied by new, strict deferral and clawback requirements. Under these requirements, at least 40% of bonuses for MRTs had to be deferred for between three and five years, increasing to seven years for senior managers. The new requirements also stipulated that MRT bonuses must be paid half in deferred cash and half in stock. In 2015, the British Prudential Regulation authority then introduced its own strict clawback rules, stating that bonuses paid to senior managers could be clawed back in their entirety for the previous seven to 10 years if wrongdoing subsequently emerged.
Bonuses weren't like this during the "excessive risk-taking" days recalled by the TUC. Then, bonuses were big, a large proportion of them was paid in cash, and there was no means of retrieving money earned under false pretences. This is how Dick Fuld, CEO of Lehman, was able to walk away with his $484m of total compensation paid in the eight years prior to Lehman's demise. Fuld's only punishment was the fall in the bank's stock price, and its impact on his stock bonuses.
During the excessive era, it was also possible for bankers in London to move with lavish guaranteed bonuses, often extending over multiple years, irrespective of performance. Sanaz Zaimi, for example, was rumoured to have received $17m over two years when she went from Goldman Sachs to BofA in 2009. However, multi-year guarantees were banned in London in 2011 and even single year guarantees only allowed in exceptional circumstances.
Bonus buyouts are also different now. It used to be the case that when senior bankers moved from one bank to another, they received all their deferred stock bonuses from a previous employer at once, leaving the previous employer with no means of clawing those bonuses back if they were found to have done something wrong, and creating a strong incentive to skip from one bank to another. This was stopped in 2016, when the Bank of England said bonus buyouts must also be subject to clawback and deferred across multiple years.
Even if London banking bonuses increase again in 2024, these safeguards are still in place. A banker with a $10m bonus, who can only access $4m of it over a five-year period, and who's liable to have the entire $10m clawed back even after leaving his/her job, is likely to be a lot less gung-ho than a banker who earns $10m for ephemeral profits and then rides off into the sunset. Equally, swapping jobs is no longer a way of cashing-in and escaping past misdemeanours in the London market.
Instead of the bonus cap's demise, therefore, critics like the TUC should really be watching for lobbying to lift rules on deferrals, clawbacks and guaranteed bonuses. If these rules go too, the excesses might return. If they don't the prospect of repaying newly inflated bonuses up to 10 years after receiving them should be enough to induce ongoing sobriety. Or so we hope.
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