To what extent will low and middle earners benefit from Kwasi Kwarteng’s decision to scrap the bankers’ bonus cap.

Scrapping the banker bonus cap risks taking us back to an era when bankers were heavily incentivised to discard any concern for their customers, wider society or basic ethics. A blog by Luke Hildyard

According to the most recent data from the European Banking Authority, the UK already has more high-earning bankers (defined as €1m+) than the rest of Europe put together. London is the second biggest financial centre on earth. So there are already tonnes of bankers here. Tweaks to pay structures aren’t going to bring significantly additional numbers flooding in (particularly bearing in mind that non-EU financial centres already don’t have to apply the bonus cap and EU banks have to apply it wherever their staff are located).

Having seven times as many high earning bankers as Germany and 13 times as many as France doesn’t prevent median household incomes in the UK being much below those countries, and on course, according to recent Financial Times analysis, to be overtaken by Slovenia and Poland.

Having a big financial services sector and lots of high earning bankers isn’t making us a high-performing economy. That doesn’t mean that the sector is irredeemably bad or that we shouldn’t try to make it stronger but it does mean we should keep its contribution in perspective and be realistic about its potential.

The other reason given for scrapping the bonus cap is that it will reduce banks fixed costs and stabilise the system, because they’ll be able to offer a greater element of pay in variable form, rather than the current limit of 100% of salary.

This argument supposes that when the cap was initially introduced in 2014, payments that would previously have been made in bonus form were converted to salary. This is difficult to prove or disprove – bankers pay levels recorded by the European Banking Authority have gone up and certainly the proportion paid as fixed salaries has increased dramatically. However, upward pressure on pay in an industry where highly-paid staff are perceived to be key drivers of value is constant. Key banking markets, such as mergers and acquisitions, have been much busier since 2014 than in the preceding years. 

Bankers’ pay would have gone up anyway. And given that research and basic common sense suggests that people will accept a lower guaranteed amount  (ie a salary) in preference to a higher award with some risk attached (a bonus conditional on meeting targets) it’s most probable that it would have gone up more without the cap than it actually has.

Banking pre-2014 was characterised by the financial crisis caused by the market in toxic mortgage-backed securities and a tonne of banking scandals from the manipulation of interest rates and foreign currency exchange rates to the laundering of money for Mexican drug cartels. Bankers throughout that era of chaos and immiseration were heavily incentivised to discard any concern for their customers, wider society or basic ethics by the prospect of bonuses many times their annual salary.

This is the era that scrapping the cap risks taking us back to, for no economic gain.