Examining the Influences Behind the Introduction of the Bonus Cap
In light of the global financial crash in 2008, the bonus cap was introduced in 2014 by the European Union and the United Kingdom.
“The GFC was caused by unscrupulous investment banking and insurance practices that passed all the risks to investors.”
According to The Balance
The idea behind the bonus cap is to discourage excessive risks taken by employees in investment banks, who would engage in such risks in order to seek a bonus—a sum of money added to an individual’s wage as a reward for good performance. The bonus cap stipulates that remuneration should not exceed 100% of the salary, or 200% with shareholder approval.
Measuring Success: The Effectiveness of the Bonus Cap
In reality, there were several ways in which this law proved ineffective. Firstly, the aim assumes that bankers are rewarded solely through bonuses, failing to consider the possibility that banks may adjust their pay structures in response to the regulation. Moreover, not all banks were subject to these restrictions; the caps only applied to banks operating within the EU and the European Economic Area member states. Consequently, raising wages in response to the bonus cap could put a firm at a competitive disadvantage compared to non-cap-applicable competitors. If a firm must allocate a significantly larger proportion of its budget to increased wages, it may hinder its ability to effectively compete internationally or regionally. Therefore, the proposed wage increase as a response to the cap is relatively ineffective.
However, a successful approach to circumvent the cap is through the use of allowances. In addition to wages and bonuses, employees can receive allowances, which are regular sums of money provided to meet their needs and expenses. This method enables firms to effectively reward their employees for successful business transactions, thereby helping to alleviate the constraints imposed by the bonus cap.
An Overview of Changes Made to Bonus Cap Regulations
Since 2014, there have been amendments to the regulations. For instance, adjustments were made to accommodate smaller institutions by increasing the cap threshold from €500,000 to €1 million.
To conclude, as firms have discovered loopholes to mitigate the restrictions imposed by this regulation, it is imperative that the bonus cap is continuously developed and modified in response to these challenges. This is vital to prevent another financial crisis from occurring.
Written by Faaris Ahmed
Produced by Madhav Bhimjiyani
Brilliant article Mr Ahmed.
The read on this was just eloquent; well done faaris lad.