Goldman Sachs scraps bonus cap for senior London bankers

Goldman Sachs has scrapped the bonus cap for its British bankers in a move that will allow star traders and dealmakers to earn up to twenty five times their salary in performance-linked awards.

The Wall Street bank said its decision to bring back multimillion-pound bonuses was driven by a desire to better manage costs and reward success. It said the change would help make the UK more attractive to star bankers.

It comes after the Government last year abandoned European Union rules that limited bonuses to a maximum of double base pay, as part of an attempt to reinvigorate the City after Brexit.

Goldman is the first major bank to change its rules as a result, though HSBC has also proposed scrapping the limit. Other investment banks are consulting on a similar change and most are now expected to follow Goldman’s lead to avoid losing talent to a rival.

Around 6,000 bankers work at Goldman’s London office. Key employees likely to benefit from the changes include Mark Sorrell, son of advertising executive Sir Martin Sorrell. Mr Sorrell co-heads the bank’s mergers and acquisitions team and has been helping Royal Mail and Anglo-American fend off takeover approaches.

The bank’s co-heads of investment banking, Anthony Gutman and Gonzalo Garcia, may also benefit from the axing of the bonus cap.

Replicating New York’s bonus culture could mean huge payouts. British-born trader Ed Emerson earned an estimated $100m in three years running Goldman Sachs’s commodities arm in New York before leaving the bank last year.

A Goldman spokesman said: “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.”

It comes amid a broader debate about executive pay in Britain, with some bosses blaming lower pay in the UK compared to the US for the decline of the London Stock Market.

Harvey Knight, a partner at City law firm Withers who oversees its financial services regulatory team, said: “This is a welcome boost to the international competitiveness of London as a market in which senior executives can live, work and prosper.”

UK Finance, a trade body for banks, said: “Having the option to make changes following the removal of the regulatory bonus cap is something that supports the UK financial services industry in being more globally competitive.”

The bonus cap was introduced across the EU in 2014 to crackdown on the perceived excesses in banking in the aftermath of the financial crisis.

Barclays investment bank head Rich Ricci pocketed £18m in bonus shares in 2013, the year before the bonus cap was introduced. That year Barclays paid more than 400 bankers over £1m split between pay and bonuses, including five who received more than £5m.

Rather than curb rewards, the bonus cap pushed up base salaries. Banks increased base pay to ensure they could still compete internationally for talent. Bank of England Governor Andrew Bailey previously described the policy as “misguided”.

Bankers have generally preferred having a larger proportion of their pay fixed rather than dependant on their bonuses, as it helps with regular costs such as mortgage payments and private school fees.

Canice Hogan, chief executive of executive recruitment firm Shadowhound, said: “London has higher fixed pay compared to New York and that becomes a great advantage to bankers. If your fixed pay is high there’s far less risk for you and much greater risk for the investment bank”.

However, banks themselves did not like the policy as executives were less able to cut pay during downturns, when staff would ordinarily have been forced to accept a “doughnut” bonus of zero.

The changes announced by Goldman Sachs on Thursday will mean bankers’ salaries will be lowered as the company makes a greater proportion of rewards performance-linked.

The adjustment will be gradually phased in from July 1, employees were told in an update from Richard Gnodde, head of Goldman Sachs International.

The Telegraph has previously reported that some top bankers were unhappy at the prospect of having their base pay lowered.

Mr Hogan said: “The first bank that turns around and says we’re reducing all bank salaries by 25pc will be the one making a bold move. That’s more likely to cause conflict and attrition.”

Other investment banks have been reviewing their bonus policies and a source at one said they were likely to have to speed up their decision in light of Goldman’s announcement.

They described Goldman’s decision to cap bonuses at 25 times base pay as “punchy” but suggested rivals would now have to offer a similar level of reward to stay competitive.

HSBC is expected to scrap its bonus cap later this week. Chief executive Noel Quinn said on Tuesday that axing the policy was an “opportunity” to get a better balance between salaries and bonuses for the bank.

Barclays has refused to remove the cap.