Home News What does the bankers' bonus cap mean for Lloyds Banking Group plc and RBS?
What does the bankers' bonus cap mean for Lloyds Banking Group plc and RBS?
Thursday, 28 February 2013 11:51

EU officials last night struck a provisional deal to cap bankers' bonuses.

Bonuses at the big UK banks, including Royal Bank of Scotland Group plc (LON:RBS) and Lloyds Banking Group plc (LON:LLOY), often dominate headlines, with RBS revealing this morning that it paid out staff bonuses of £607 million last year despite also reporting huge losses.

A forced change could be taking place as European Union officials last night struck a provisional financial deal which includes putting a cap on bankers' bonuses at a year's salary. Though some might still earn twice their salary if shareholders approve.

Professor of Organisational Behaviour at Cass Business School, Andre Spicer, comments: "The new EU curbs on bankers’ bonuses will force banks to rethink how they motivate their star performers. For some time banks have relied on super-sized bonuses to attract and retain star performers. Now bonuses are to be capped at two times salary.

"This could be good news for banks as most of the research suggests large cash bonuses are a very poor way to reward complex tasks. In fact, large immediate cash rewards can actually mean people perform worse. Cutting back on large bonuses could see better decisions being made.

"Some of the alternatives to large bonuses will include longer term incentives which are linked to performance of the institution over five or 10 years. It might include soft incentives such as better working hours, more supportive work environments, more opportunities for self-actualisation and more interesting design of jobs.

"This could lead to workplaces where bankers are no longer willing to put up with 364 days of stressful work and one good day when bonuses are paid.  This will mean banking is likely to be a more attractive job for a wider range of people.

"The cap on bonuses will also mean that banks need to rethink their business models. Until now banks have relied on a few stars in small units of investment banking to make significant chunks of the bank’s profit. Now banks will need to think about ways of harnessing the talent of the vast majority of their employees who don't receive giant bonuses.

"This could see the large banks returning to older style banking. But it could also see star performers moving to smaller financial institutions outside the banks, such as private equity or hedge funds."

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