European banks are going to struggle in London. This is why
The European Union bonus cap has been officially scrapped in London, and the world has changed. Some banks in the city - mostly British and American ones - also scrapped their caps very quickly. Some banks in the city - mostly European and Japanese ones - have kept them. The former group is well placed for the future... And the latter is not.
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Adrian Crawford, employment partner at law firm Kingsley Napley, explained why. “There is currently [a] divergence in the market,” between the two bonus approaches, Crawford said. This could lead to "a difference in culture between European and US banks" in the long run.
The divergence is partly related to inertia - changing European banking culture is very complicated. “European banks have probably been slower to make any change because doing so will mean treating UK staff differently from those in Europe,” Crawford explained. The EU itself is also involved in the process: “making changes which are now permitted under the UK rules might raise issues with other regulators outside the UK to which banks are subject.” If you're a European bank that's passported into London and is regulated in Europe, scrapping the cap is probably not an option.
This is difficult, because bankers will always be drawn to bonus potential. “Any bank which does not offer an attractive bonus opportunity is likely to lose staff and become less competitive,” Crawford said. “Bankers consider themselves to be strong performers,” whether they are or not, and they seek the opportunity to prove themselves.
“Lower performers may prefer the security of higher fixed pay and less bonus opportunity,” Crawford said, and “star performers can therefore be confident of being well-rewarded in either environment”. Top performers want the chance to prove themselves, and earn bonuses.
And so those that remain in European banks will have a few things in common. They will be people who prefer the security of high fixed compensation (salaries) more than the potential of variable compensation. And they will be a generally lower-performing group of individuals.
The benefits for the banks that choose to keep the cap will be limited. A blog post on Bank Underground, written by dissenting and anonymous Bank of England staff, said back in 2022 that under the bonus cap, high-performing bankers simply had their salaries increase as well as their bonuses. There was no real impact from the bonus cap on how total compensation grew, just its composition.
In reality, the bonus cap just means that, due to ever-increasing salaries, bankers face limited consequences and banks have less flexibility in down years. When pickings are slim, American banks will be able to pay their most expensive employees less. European banks will be saddled with heavy salaries. Weirdly, bankers overwhelmingly prefer, and will seek out, the former over the latter.
“A bank which retains role-based allowances and a lower bonus cap has higher fixed costs and less ability to reward star performers with high bonuses,” Crawford said.
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