Analysts say new EU bonus caps could increase risk

Following news that the EU has agreed to cap the bonuses that banks can pay to staff (full article). Analysts have said that these rules could pose a major problem to European banks. Jon Terry, remuneration partner at PwC said:

Bonus caps will reduce both Boards' flexibility in managing one of the most important elements of the cost base and shareholders’ ability to influence pay outcomes. What we really need is greater alignment between performance and pay. Capping bonuses will weaken the link between performance and pay.

The consequences will be extensive, and most of them unintended. Introducing bonus caps runs the material risk of increasing risk, rather than reducing it.

The British Bankers’ Association's Anthony Browne has written for us on the role that bonuses play:

I am often asked why bankers should be paid bonuses at all. Like employers across the UK economy, retail banks and investment banks find that performance-related pay is a useful tool to incentivise workers. In banking, profits rise and fall rapidly, and having a large proportion of variable pay means that, in down years, banks can cut pay rather than jobs. That leaves more people working – in the UK’s most successful export sector – to generate business when the economy picks up. If you got rid of bonuses, banks would only have the option of cutting jobs, hampering the recovery of the UK economy.

(Full article)