In December 2022, the UK government announced that it was proposing to remove the EBA bonus cap. This is a significant change that could have a number of implications for businesses in the UK, including other industries besides banking.
What is the EBA bonus cap?
The EBA bonus cap is a limit on the amount of bonus pay that can be awarded to any individual by a bank or other financial institution in the UK. The cap was introduced in 2013 in response to the financial crisis of 2008, which was partly caused by excessive risk-taking by banks and other financial institutions.
The cap limits the amount of bonus pay that can be awarded to any individual to no more than their fixed salary, or 2:1 with explicit shareholder approval.
Why is the UK government proposing to remove it?
The UK government is proposing to remove the EBA bonus cap because it believes that the cap has not been effective in reducing excessive risk-taking. The government believes that the cap has simply led banks to find other ways to reward their staff, such as through higher salaries or stock options.
The government also believes that removing the cap will allow banks to attract and retain the best talent, which will ultimately benefit the UK economy.
What are the implications for other industries?
The removal of the EBA bonus cap could have implications for other industries besides banking. For example, it could make the financial sector more appealing to employees in other sectors, as it would offer the potential for higher bonuses. This could lead to increased competition for talent between the financial sector and other sectors.
The removal of the EBA bonus cap could also lead to increased international movement, as it would remove a barrier to overseas talent joining UK institutions. This could benefit the UK economy by bringing in new skills and expertise.
However, it is important to note that the removal of the EBA bonus cap could also lead to increased risk-taking. This is because businesses in other industries may be less risk-averse if they are not capped on the amount of bonuses they can pay. This could lead to financial instability, which could harm the UK economy.
What can businesses do to prepare?
Businesses in the UK that are affected by the removal of the EBA bonus cap should take steps to prepare for this change. These steps include:
- Reviewing their remuneration policies: Businesses should review their remuneration policies to ensure that they are competitive and aligned with their business goals.
- Communicating with employees: Businesses should communicate with employees about the removal of the EBA bonus cap and how it will impact their remuneration.
- Developing a risk management plan: Businesses should develop a risk management plan to mitigate the risks associated with increased risk-taking.
Next steps:
The UK government is currently consulting on the removal of the EBA bonus cap. If the cap is removed, it is likely to take effect in 2023. Most impacted organisations are expected to implement changes to their policies for performance year 2024.
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RL Management Consulting can help businesses work through the considerations and generally optimise their reward strategies. We love working with businesses assess their current reward strategies, identify areas for improvement, and implement changes. We can also help businesses communicate their new reward strategies to employees and manage the transition.