Goldman Sachs, a leading Wall Street banking giant, has announced that it will be removing the cap on bonuses for its London-based staff. This decision, which was exclusively revealed by Sky News, paves the way for the company to resume making multimillion pound payouts to its top-performing traders and dealmakers.
The bank informed its UK employees on Thursday that it would be abolishing the existing pay ratio imposed under European Union rules, which the UK government recently decided to scrap. In a video message to staff, Richard Gnodde, the Chief Executive of Goldman Sachs International, stated that the company has decided to align its remuneration policy in Britain with its global operations.
“We are a global firm and, to the extent possible, we adopt a consistent global approach across everything we do,” Mr. Gnodde said in the message relayed to Sky News. “The bonus cap rules were an important factor preventing us from being consistent in the area of compensation.”
He further explained that this shift would result in lower fixed pay but a higher proportion of discretionary compensation, in line with the prudential objectives of their regulators. The removal of the cap means that several hundred UK-based Goldman staff will now be eligible for variable pay worth up to 25 times their base salaries, according to insiders.
As a consequence, the allowances that were introduced to help employees deal with the cap will begin to be reduced from July 1st, Mr. Gnodde informed employees. However, sources close to the bank clarified that this revised approach does not necessarily mean senior employees will be paid more, but rather that they can now be appropriately rewarded for exceptional performance. Furthermore, the move will allow Goldman more flexibility to manage its fixed cost base.
Goldman is among the first major investment banks to signal its intention to pursue a revised approach to remuneration following the cap’s abolition by UK regulators in October 2020. Under the cap, firms were prohibited from paying their most senior staff more than twice their fixed pay in bonuses. Some banks used the mechanism of a fixed-pay allowance in addition to employees’ base salaries to give them more flexibility to pay larger bonuses.
While Goldman’s move may draw controversy, the EU bonus cap received criticism from many influential figures in finance over the years, including Andrew Bailey, the Bank of England governor. In 2014, he stated that it was “the wrong policy [and] the debate around it is misguided.” Former UK Chancellor Kwasi Kwarteng also moved to scrap the cap, citing its potential to boost the international competitiveness of Britain’s financial services sector.
UK regulators agreed with this sentiment, stating that removing the cap would aid financial stability by allowing firms to reduce pay faster during downturns or in scenarios where they needed to conserve capital. Mr. Gnodde has publicly endorsed the removal of the cap, stating in 2020 that doing so would “put the UK on the same footing, aside from the EU, with every other major financial centre.”
While Goldman is among the first to notify its employees about its amended stance on bonuses for UK staff, many of its peers, including bosses at lenders such as Deutsche Bank and Santander, have also criticized the cap. At its annual meeting on Friday, HSBC is expected to win shareholder approval to remove the two-to-one pay ratio. Other firms are also reviewing their UK compensation practices in light of the cap’s abolition.
Many industry executives argue that the cap actually encouraged greater risk-taking because it put smaller sums of money at risk for senior bankers. Insiders also pointed out that, as the bonus cap does not impose a limit on overall remuneration, it had placed upward pressure on salaries and allowances not linked to longer-term performance, which could not be reduced or clawed back if failure or previous misconduct had subsequently emerged.
In response to an enquiry from Sky News, a Goldman spokesperson stated, “This approach gives us greater flexibility to manage fixed costs through the cycle and pay for performance. It brings the UK closer to the practice in other global financial centres, to support the UK as an attractive venue for talent.”
Goldman has often been at the forefront of responding to changing public policy regarding bankers’ pay. In 2010, it imposed a £1m pay ceiling on its UK staff after the then Labour government introduced a one-off tax on bank bonuses in response to the public outcry over the financial crisis. The bank’s decision to remove the two-to-one ratio comes as UK regulators also consult on the length of deferral periods for variable pay for senior bankers.
Mr. Gnodde informed staff on Thursday that Goldman would continue to lobby for closer global alignment on deferral periods, which would mean reducing the current UK duration from seven years.
