A new framework drawn up by the Wall Street behemoth will mean senior bankers can now earn 10 times their fixed pay in annual bonuses, Sky News learns.
By Mark Kleinman, City editor @MarkKleinmanSky
Wall Street’s biggest bank is lifting Brussels’ bonus cap for its London-based staff, weeks after rival Goldman Sachs fired the starting gun on a post-Brexit era in industry pay.
Sky News can reveal that JP Morgan Chase was in the process of notifying staff on Wednesday that it would preserve some elements of the remuneration packages introduced after the European Union’s cap on variable pay came into force in 2014.
The system prevents material risk-takers (MRTs) working in lenders’ operations in the EU from earning more than twice their fixed pay in variable compensation.
Sources said that JP Morgan, which employs 22,000 people in the UK, including roughly 14,000 in London, had decided to preserve a significant proportion of the fixed pay allowances used to calculate eligible employees’ maximum bonuses.
The US-based banking behemoth has also decided to raise its bonus cap threshold from two times’ fixed pay to a multiple of 10.
That would mean a senior JP Morgan banker or trader in Britain who earned £2m in annual fixed pay would, from this year, be eligible for a bonus of up to £20m, rather than £4m under the EU rules.
A source said that broadly maintaining fixed pay levels was desirable even for senior staff focused on managing monthly household expenses such as mortgages.
Responding to an enquiry from Sky News, a JP Morgan spokesman said: “We believe we have developed one of the most attractive and balanced pay structures in the industry. Fixed pay will remain very competitive, and we will have ample room to reward the highest performers appropriately.”
Sources close to the bank said its analysis suggested that the removal of the EU bonus cap was unlikely to materially impact total annual pay levels during the current financial year.
“Bonuses will continue to be discretionary and driven by performance on a year-to-year basis,” one insider said on Wednesday.
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The new structure is understood to be sufficiently flexible to adjust fixed pay levels if the regulatory landscape shifts further.
Sky News revealed details of Goldman Sachs’ plans last month, with the bank opting to increase its cap from 2:1 to 25:1.
Under Goldman’s revised structure, however, its fixed pay allowances are being largely removed, meaning bonuses will invariably be calculated from a lower base than those at JP Morgan.
The move by Wall Street’s two biggest investment banks to recalibrate how they approach pay for their top UK-based staff is expected to trigger an arms race among rivals as they seek to remain competitive.
A JP Morgan insider said the bank believed its revamped pay structure would be attractive both to bankers working for rivals, and those it wanted to lure to Britain from outside the country.
At Goldman, the firm’s boss outside the US said the bonus cap had prevented it from adopting a consistent approach to pay.
Banks argued against the bonus cap for years, saying it did nothing to reduce risk-taking behaviour and that in many cases it achieved the opposite.
Among those who publicly opposed it was Andrew Bailey, the Bank of England governor, who said in 2014 that it was “the wrong policy [and] the debate around it is misguided”.
Because the bonus cap does not impose a limit on overall remuneration, senior industry figures warned that it had placed upward pressure on salaries and allowances not linked to longer-term performance, and which could not be reduced or clawed back if failure or previous misconduct had subsequently emerged.
During his ill-fated stint as chancellor in Liz Truss’s administration, Kwasi Kwarteng moved to scrap the EU bonus cap, saying it would boost the international competitiveness of Britain’s financial services sector.
UK regulators agreed that scrapping the cap would aid financial stability by enabling firms to reduce pay faster during downturns or in scenarios where they needed to conserve capital.
Bosses at lenders such as Deutsche Bank and Santander have also criticised the cap, while Barclays and HSBC have won shareholder approval to remove the two-to-one pay.
