When UK financial regulators put in place a maximum ratio of incentive-to-fixed pay of 1:1 (2:1 with shareholder approval) — commonly known as the bonus cap — the goal was to remediate the excessive risk taking that was largely responsible for the 2008 financial crisis. Introduced with other post-crisis compensation-related regulations (e.g., deferral requirements, malus and clawback provisions), it quickly became clear that the cap was highly distortive to pay structures and competitiveness.
Yes, the cap did address public and political outrage around high banker pay by bringing down absolute levels of total compensation (TC). However, it also resulted in much higher, stickier levels of fixed pay as well as loss of competitiveness vs. non-regulated firms and locations. Remember: The cap applied globally to all major risk takers (MRTs) at UK headquarters firms, while non-UK headquarters firms had to comply only in the UK.
In response to the cap, firms raised fixed pay significantly, and many implemented non-pensionable role-based allowances (RBAs) structures to allow enough headroom to pay reasonable bonuses that complied with the 2:1 cap.
Regulators’ removal of the bonus cap in late 2023 launched an ongoing journey toward lower fixed-pay levels and higher TC opportunities at regulated banks. (Note: Continental European financial services regulations, except for Switzerland, largely paralleled the UK before the removal of the bonus cap, and the cap remains in place for firms regulated by the European Banking Authority.) The removal of the bonus cap effectively split employees into two distinct groups.
In 2024, most firms put in new, higher internal incentive to fixed caps ranging from 2 times (NatWest) up to 25 times (Goldman Sachs) fixed pay. Beyond that, though, most firms today have not yet made significant changes to individual employees’ fixed-pay levels (e.g., lowering fixed pay and increasing bonus/TC opportunities).
Firms cite incentive deferral requirements still in place (40% for normal MRT; 60% for high earners) as a primary reason for the inaction so far. They say that reductions in fixed pay would result in pay mix imbalances in upfront vs. deferred bonuses as compared to staff at non-regulated banks. UK regulators have said they will review deferral requirements, but that has not happened as of this writing.
Additionally, firms have cited concerns around potential legal sensitivities, such as the ability to unilaterally modify employment contracts, as well as internal equity concerns around modifying fixed pay. They are exploring other approaches, though, such as bringing in new hires or promoting from within on a lower fixed-pay basis, but these choices also come with internal equity concerns.
Recent annual report filings indicate that most major UK headquartered banks will propose significant changes to executive director pay that will be put to shareholder vote at upcoming 2025 annual general meetings. This type of policy change typically is approved via binding shareholder vote every 3 years.
While the extent and range will vary by firm, common themes have emerged regarding proposed changes to CEO and CFO pay including:
| Bank | Proposed 2025 fixed pay changes | Proposed 2025 incentive changes | Proposed 2025 new max TC opportunity vs. 2024* | Broad-based MRTs’ new max internal ratio |
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| Barclays |
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| HSBC |
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| NatWest |
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| Standard Chartered |
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| Lloyds Banking Group** |
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* Calculations of maximum TC opportunity exclude pension and benefits. TC opportunity consists only of base, regulatory allowance (if applicable) and maximum STI and LTI opportunity.
** Lloyds Banking Group for 2025 will propose only an increase in fixed-share allowance, but expects to propose significant policy changes for 2026 renewal.
The 2023 regulatory removal of the bonus cap in the UK was a welcome — if long overdue — development. The change will allow regulated banks to move toward more market-aligned pay structures for both senior executives and broad-based MRT populations.
Interestingly, apart from the need to obtain shareholder approval to change executive director structures, the journey toward a future state is, in some ways, proving most complicated for the broad-based MRTs because of the still-to-be-reviewed regulatory deferral requirements and internal equity concerns, among other challenges. In any event, the proposed changes for executive directors will at least provide some needed relief in market competitiveness as well as recruiting and retention concerns among UK-based banks that are competing against global institutions for senior talent.
