According to reports the Chancellor of the Exchequer Kwasi Kwarteng is planning on scrapping the caps on British bankers’ bonus pay. This is set to be announced alongside the remaining winter budget by the Chancellor in full on Friday. But what is the pay cap and how would scrapping it affect the economy?
What is the bankers bonus pay cap and why was it introduced?
Set into law by the European Union in 2014 after the events of the 2007-2008 financial crisis, the bonus pay cap for bankers prohibited them from earning more than double their annual salary. These bonuses would include extra earnings from commissions and share profits.
The cap was introduced alongside a range of other financial regulations in 2014 to discourage banks and individual bankers themselves from excessive risk taking and prioritising short-term profits over long term stability. The general idea of the bonus pay cap was to reduce the opportunity for bankers to engage in risky behavior. As their salaries were guided by work performance, this cap meant they were no longer able to make as many risky financial decisions.
Did the pay cap work?
Initially the decision was met with heavy backlash by the British government, with then Chancellor George Osbourne challenging the law in the European court of justice. The Bank of England equally expressed its’ concerns about the ruling, claiming that it would raise salary costs and reduce finances available to be invested in other areas. This could be seen following the financial collapse of 2008 with banks such as RBS and Lloyds drastically cutting back on their investment departments.
However there has also been a significant decrease in the rise of bankers’ real wages in the past decade, which is credited in no small part to the bonus pay cap. The bonus pay system rewarded bankers who took greater risks, which may have led to adverse effects for the bank, and the economy on a larger scale. Thus, having less of an incentive to take such risks helped decrease its frequency greatly since the financial crash of 2008.
So why should the cap be scrapped?
The current governments’ economic growth model to combat the cost-of-living crisis in the coming winter months is likely to lead to a slew of tax cuts and other pro-business decisions made by the Chancellor. The decision to remove the bonus pay cap is likely to have little effect on what banks already pay their staff, however its’ removal is claimed to have beneficial effects on the competitiveness of British banking and investment.
The unfortunate truth is that the removal of the cap will have little effect on the current banking system, as banks already have other ways of paying their staff bonuses. The government must also take into account the context in which they are making this decision. At a time where many are struggling to pay for high energy bills and food, the removal of caps on bonus pay for workers in a profession with an already high average salary is unlikely to sit well with the general public.
