With the bonus cap lifted, London banks are in a dilemma about pay
The bonus cap has been lifted in London, and it's not coming back. Shadow Chancellor Rachel Reeves told the BBC today that Labour has no intention of reimposing the cap if elected. London bonus restrictions are dead and gone.
And yet, despite the cap's demise, the mitigations that banks implemented to deal with it are proving curiously enduring.
When US banks announced their bonuses this month, the expectation was that they would cut the monthly 'allowances' that were granted to supplement fixed pay and that enabled banks to pay high performers when the cap was introduced in 2013.
The EU bonus cap restricted bonuses to no more than twice salaries for regulated staff. To avoid increasing salaries too much while continuing to pay the same amount, most banks introduced these fixed allowance payments alongside salaries. When JPMorgan president Daniel Pinto was based in London, for example, he received a salary of £475k, a bonus of $16m, and an enormous role-based allowance of $7.6m.
Instead of increasing bonuses and cutting these role-based allowances as expected now that the cap has been lifted, multiple headhunters say US banks have simply kept the allowances going. "The bonus year hasn't been stellar, but the allowances also haven't been cut, so people still have their fixed pay," says the head of one search boutique.
Goldman Sachs, Citi and Bank of America declined to comment for this article. Off the record, insiders at some banks agreed that the allowances are still in place.
US banks' perpetuation of allowances reflects difficulties in removing them without changes to contracts. At the risk of annoying senior bankers, they seem to have stuck with the status quo.
Headhunters say this is complicating matters for European banks, which - if they have a branch in London and are free to remove the allowances, would quite like to do so. But European banks don't want to make themselves uncompetitive if US banks continue paying allowances to their top staff.
For the moment, there's a standoff. In a bad bonus year, that suits senior bankers fine. It's less helpful to banks, which are trying to cut costs.
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