The new Chancellor, Kwasi Kwarteng, is said to be considering scrapping the EU’s cap on bonuses in the financial sector. This would be hard to sell to the public, but is still the right thing to do.
The ‘bankers bonus cap’ is part of the Capital Requirements Directive IV that was first applied to credit institutions and investment firms across the EU in 2014. It limits the discretionary bonuses that they can pay to senior managers and other “material risk takers” to no more than 100% of their fixed (basic) pay, or 200% with the approval of shareholders. It remains part of the UK rules after Brexit.
The case for scrapping the cap is straightforward. It is a clumsy rule whose costs outweigh any potential benefits. In particular, it has led firms to increase basic pay and made it harder for them to adjust variable pay, This has added to…
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