One of the many announcements in the Government’s ‘mini budget’ towards the end of last month was that current caps on bonuses would be removed. These limited the bonuses that could be paid to employees working in financial institutions to a year’s salary, or two years with shareholder approval.
The Government say that abolishing the bonus cap is intended to help attract talent to the UK, and the City in particular, with the aim of increasing growth. However, it remains to be seen whether this will happen.
When the bonus cap was introduced in 2014 many employers increased salaries and introduced other benefits to compensate staff for the limits on their bonuses. As a result, whilst it may be thought that employee salaries will now be reduced to allow for higher bonuses to be paid, this is almost certainly not going to happen in reality. Reducing the salary of existing employees would be a fundamental change to the terms of their employment contract. Given the current difficulties that many employers are experiencing in attracting and retaining staff, it would seem extremely unlikely that any member of staff would now agree to a reduction in their annual salary, in the hope of receiving an enhanced bonus in the future, with no guarantee that any would in fact be paid.
Instead what is likely to happen is that existing salary levels will remain at their current amounts, but employers who are keen to retain their highest performers will pay them higher bonuses. However, this is likely to result in a large difference in overall renumeration between these ‘key’ members of staff and lower performing ones. This could lead to an increase in equal pay and/or sex discrimination claims, as well as an unstable workforce when employees are seeking to maximise their income and may be more inclined to ‘jump ship’ to a competitor who is offering them a better deal, which will further fuel the war for talent that many employers are currently experiencing.
Those who are made redundant may also be more inclined to bring claims to challenge their dismissal because of the loss of valuable bonuses, particularly where employers carefully time redundancies in order to avoid paying out hefty bonuses, which may become more common as the economic climate worsens.
There are also compliance risks for employers whose bonuses reward performance as employees may feel inclined to take more risks for greater rewards. This could lead to increased whistleblowing complaints with employees speaking out against the inappropriate behaviour of their colleagues, particularly if it results in them being better renumerated.
It is clear that the removal of the bonus cap is not going to be a straightforward path to growth and will have wide reaching implications. If you are concerned about what the removal of the bonus cap means for you or your business please contact a member of our specialist employment team on 0345 646 0406 or fill in our online enquiry form to discuss this further.