How will bankers be affected by the bonus cap?

With the start of the new year, the cap on the amount of bonus that bankers in the European Union (EU) can receive has come into effect.

It is hoped that the change, which officially came in on January 1st, will see a reduction in risk taking among bankers with less financial gain to be had as a result.

Officials in the EU decided in March that this was the best course of action following recommendations from the Basel Committee, which was asked to look at ways to prevent the global financial crisis of 2008 from happening again.

Chair of the European Parliament’s Economic and Monetary Affairs Committee Stephen Bowles said that the change will better align pay with reward in the banking industry.

Indeed, a partner for the reward team at PwC, Jon Terry, wrote in a blog post that the new bonus cap would “cause a fundamental shift in how bankers are paid.”

He pointed to data from the European Banking Authority (EBA) that fixed costs would rise by €1 billion (£830.7 million) across the sector as banks try to remain competitive. As fixed costs rise, he added that there is the possibility that banks may create allowances so that payment in shares can show shareholders that their interests are aligned with those of employees.

Mr Terry said: “Banks are facing the difficult balancing act of implementing the rules while keeping their staff motivated, controlling their costs, maintaining a strong link between performance and pay, and remaining competitive on the global stage.”

Under the new rules, banker bonuses cannot exceed 100 per cent of their annual salary. However, this can be doubled if the decision receives a shareholder vote of 65 per cent.

Yet for the highest paid bankers, the EBA has suggested scaling back the proposals.

Previously it said that those who earned above €500,000 per year would be subject to the cap automatically. During December, the EBA took away this proposal.