Bonus caps are now a reality for bankers working in the European Union.
This is a fundamental change and the unintended consequences should not be underestimated.
Capping bonuses will reduce boards’ flexibility in managing a vital aspect of their cost base. Instead of being able to reward staff in good times, and limiting payouts and clawing back bonuses when needed, banks will almost certainly raise fixed pay to address competitiveness issues if absolute pay levels reduce.
All stakeholders have been calling for a stronger link between performance and pay, but a less flexible reward system will weaken this link.
Bonus caps will further widen the gap between pay practices in the US, Asia and Europe, with European banks being put under pressure to keep their talent.
Jon Terry is a partner in PricewaterhouseCooper’s reward team