The introduction of an EU-wide cap on bonuses in the financial services in 2014 is associated with a rise in fixed pay as a proportion of total reward, according to the latest quarterly bulletin from the Bank of England. The approach of capping bonuses at 100% of base pay is challenged by the Bank’s governor, Mark Carney, who argues strongly that variable pay should constitute a substantial portion of overall pay in order to align incentives appropriately.
In its Bulletin, the Bank argues ‘the bonus cap is counterproductive’ because it reduces the scope for beneficial risk adjustment and reduces the cost bases of individual institutions. It cites figures showing that fixed pay as a proportion of total reward rose from 28% to 54% in the UK banking sector from 2013 to 2014. Governor Carney supports the exploration of long-term ‘performance bonds’ for senior executives: bonds would be funds built up over time from senior executives’ remuneration which would be available to recapitalise the firm or to meet substantial regulatory fines in the future. Carney argues such an approach could provide a solution to address the rise in fixed pay witnessed in recent years and any future misconduct or prudential failings.