The UK Chancellor, Kwasi Kwarteng, has announced that the UK government will lift the cap on bankers’ bonuses, a move that has drawn sharp criticism. This come at a time when the cost-of-living crisis has plunged millions of workers into financial hardship.
Based on an EU directive, the bonus cap was introduced in response to the 2008 financial crisis, to disincentivise the risk-taking that contributed to the crash. The rules, which came into force in the UK in 2014, limit bankers’ bonus payouts to 100 per cent of their salary, or double that if approved by a shareholder vote.
As the New Statesman’s Emma Haslett reported here, there is evidence to suggest that bankers are less likely to take risks when their rewards are capped.
According to Office for National Statistics data, UK financial sector workers took home bonuses worth an average of 23 per cent of their total weekly earnings in 2021.
In real terms, this amounts to an average weekly bonus payout of £316 – a 7.5 per cent increase on the previous year and the largest annual increase since 2017. As a percentage of total pay, bonus payouts for the financial sector have remained fairly steady during this period, though they still represent a proportion almost three times higher than for other private-sector employees.
Following a five-year climb, in June 2008, bonus payments in the City plummeted as the fallout of the financial crisis started to take its toll. As a percentage of total pay, they fell from roughly a third to just over a fifth between 2008 and 2009.
Around that time, the then-governor of the Bank of England, Mervyn King, warned that, “Banks have come to realise they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks.”