JP Morgan Chase, the largest bank on Wall Street, has announced plans to lift Brussels’ bonus cap for its London-based staff. This comes just weeks after rival Goldman Sachs made a similar move, signaling a new era in industry pay post-Brexit. The bank is in the process of notifying employees that it will preserve elements of the remuneration packages implemented after the European Union’s cap on variable pay was introduced in 2014. The cap restricts material risk-takers (MRTs) in EU-based lenders from earning more than twice their fixed pay in variable compensation.
According to sources, JP Morgan has decided to maintain a significant portion of fixed pay allowances used to calculate the maximum bonuses for eligible employees. In addition, the bank has raised its bonus cap threshold from two times’ fixed pay to a multiple of 10. This means that a senior banker or trader in Britain who earns £2m in annual fixed pay could now be eligible for a bonus of up to £20m, as opposed to the previous cap of £4m under EU rules. A source from the bank stated that maintaining competitive fixed pay levels is important, especially for senior staff who have financial responsibilities such as mortgages.
In response to an inquiry from Sky News, a JP Morgan spokesman said, “We believe we have developed one of the most attractive and balanced pay structures in the industry. Fixed pay will remain very competitive, and we will have ample room to reward the highest performers appropriately.” Sources close to the bank assure that the removal of the EU bonus cap is not expected to have a significant impact on overall annual pay levels for the current financial year. They also emphasize that bonuses will continue to be discretionary and based on performance.
JP Morgan’s new pay structure is designed to be flexible and able to adjust fixed pay levels if there are further changes in the regulatory landscape. This follows Sky News’ report last month on Goldman Sachs’ plans to increase its bonus cap from 2:1 to 25:1. However, Goldman’s revised structure largely removes fixed pay allowances, resulting in bonuses being calculated from a lower base compared to JP Morgan.
The moves by the two biggest investment banks on Wall Street to revamp their approach to pay for top UK-based staff is expected to trigger a competition among rivals to remain competitive. A source from JP Morgan believes that their new pay structure will be appealing to bankers from other firms as well as those they hope to attract to Britain from outside the country. At Goldman Sachs, the bank’s leader outside the US stated that the bonus cap has prevented them from adopting a consistent approach to pay.
Banks have long argued against the bonus cap, claiming that it does not reduce risk-taking behavior and, in some cases, has the opposite effect. Among those who publicly opposed the cap was Bank of England governor Andrew Bailey, who stated in 2014 that it was “the wrong policy [and] the debate around it is misguided.” The cap does not limit overall remuneration, leading industry leaders to warn that it has caused salaries and allowances not tied to long-term performance to increase, making it difficult to reduce or claw back in cases of failure or misconduct.
Former Chancellor Kwasi Kwarteng, during his tenure in Liz Truss’s administration, moved to scrap the EU bonus cap, citing its potential to boost the international competitiveness of the UK’s financial services sector. UK regulators agreed that removing the cap would promote financial stability by allowing firms to reduce pay more quickly during economic downturns or when capital conservation is necessary. Other lenders, such as Deutsche Bank and Santander, have also criticized the cap, while Barclays and HSBC have received shareholder approval to remove the 2:1 pay ratio.