Impact of EU pay rules hitting UK bonuses

Ten years after the 2008 collapse of Lehman Brothers, the wave of regulation hitting bankers pay is starting to bite as analysis published today by global law firm Linklaters, shows that the UK bonus pool for bankers is at the same level as in 2008 at $19.6billion.

  • UK bankers bonus pool shrunk by 9% over last three years
  • UK bankers bonus pool back to same levels in 2008
  • Gold-plated regulatory action limiting UK bonuses

Over the last ten years, the size of that pool increased by 16% to $23.5billion in 2013 but once the EU bonus cap rules came into force in 2014, there has been a 9% drop in the UK bonus pool over the last three years.

In addition to the EU’s bonus cap rules, the UK also introduced claw-backs of up to ten years if a banker’s employer later discovered misconduct or material errors as a result of their actions.

Alexandra Beidas, Employment & Incentives partner at Linklaters, says:

“After the global financial crisis, the regulators wanted to send a clear message that they understood the impact remuneration was having on risk-taking and they wanted to do something to address it. The rules that have been implemented in the UK are clearly affecting pay and alongside the Senior Managers & Certification Regime, it’s changing the culture within banks.”

She says: “It’s questionable whether these rules would have prevented the collapse of Lehman Brothers altogether, but it’s certainly removed the incentive for some of the excessive risk-taking you saw pre-2008.”

However, she notes that regulations, driven by the G20’s Financial Stability Board, haven’t been implemented in the same way globally. She says: “You have a scenario where the EU went full steam ahead, the UK gold plated the rules, parts of Asia just brought in guidelines and the US is still sitting on draft versions. The disparate and disjointed nature has meant that for some jurisdictions, the picture looks very different now to ten years ago, but that’s not the case everywhere.”

Analysis shows that the US bonus pool in 2017 was the largest since 2007 and over the last ten years has increased by 52% from $17.6bn to $26.9bn in 2017.

Beidas says: “It’s no secret that US bankers have historically been paid larger bonuses than their European counterparts but it’s a bitter pill to swallow when you can see that some regulators are being quite tough on financial institutions and others less so. It seems that the UK’s financial sector really has ended up with the toughest rules anywhere in the world.”

She says that whilst the rules in the UK haven’t led to brain drain, it could impact innovation in the future: “There is a lot of focus on technology at the moment and that is only going to increase in the coming years. Whilst the remuneration rules are there to address risk-taking behaviour, there’s a concern it could stifle innovation if people feel hampered by the inability to experiment and therefore do the best job possible.”