Europe is set to adopt the toughest bonus regime in the
world, after the
UK last week failed to secure a compromise on proposals to cap
bankers' bonuses. But what exactly do the rules mean, and
will the regulation allow for any work-arounds?
The only concession to emerge
from the March 20 announcement of the technical rules related
to timing. Although the rules will be implemented on January 1
2014, they will not apply to bonuses paid in 2014 for 2013
The bonus cap forms part of Europes implementation of
Basel III. It will ban banker bonuses that are more than twice
fixed pay, and limit the maximum portion of variable pay that
can be discounted to 25%.
The delay is welcome but the rules themselves
dont appear to have changed, said Linklaters
employee incentives lawyer Alex Beidas. Bankers had hoped
the proportion of variable pay subject to a discount would
increase from 25%.
The proposals are a major concern for banks, especially for
those operating outside Europe.
Although banks had hoped to get a dispensation that
their operations outside Europe wouldnt be caught that
hasnt been accepted, said Beidas. All
European banks with operations in the US are going to struggle
to compete with US banks that will not have to implement this
cap in the US.
Within Europe, there is concern that the rules will drive
the top talent to other financial centres. The cap poses the
biggest threaten to those based in London, the blocs
This is exacerbated by the fact that the European Union (EU)
is now looking at
extending the cap to other directives such as the
Alternative Investment Fund Managers Directive (AIFMD) and
Undertakings for Collective Investment in Transferable
Robin Chater of the Federation of European Employers, an
advisor to the European Commission (EC) for ten years, said
there was a failure to understand the purpose of high level
remuneration in financial institutions. While its
unpopular in the public view, it has one essential
purpose, he said. It stops bankers being tempted to
put their hand in the till.
To Chater, the EUs move to clampdown on bonuses is
ultra vires or beyond the powers granted to the
EU by the Treaty of Lisbon. The Treaty, said Chater, is very
Various people are claiming that its really
under the banking regulations that the bonus issue has been
raised, added Chater. Im afraid theres
no carte blanche in this respect, the Treaty has to be
seen in its entirety: one part of the Treaty cannot be at odds
with another, otherwise it would be a nonsense.
However, the EC has been firm on its position that its
not limiting the amount of pay but requiring that a ratio is
set between fixed and variable pay.
Beidas said the EC seemed quite confident that its
within the rules. Theres no clear definition of pay
so the point can be argued either way, he said.
According to Chater, the solution was simple. The
obvious result, unless the legislation is written in a very
careful way, would be to increase base salaries so you
effectively have a bonus system in reverse, he said.
This would be achieved by means of a conditional base salary
set at a higher level paid provided the employee meets a set of
So the bonus cap achieves nothing really but it does
stir things up a bit and makes people come out against the City
even more, Chater added.
Firms will have to be careful about how they structure
Beidas told IFLR there were anti-avoidance
provisions. The current wording in the draft legislation also
has very specific definitions of fixed pay and variable pay.
Fixed pay is meant to be in respect of fulfilling the job
description and variable pay is what employees get in respect
of performance, he said.
It will be necessary to justify an increase in salary
and if its made conditional then it might actually be
considered to be variable pay, added Beidas.
Like many, Beidas believed the cap is politically driven.
Weve made significant progress over the last two
years in the way banks pay their staff and its now much
more about pay for performance and aligning staff with the
long-term interests of the banks, said Beidas. The
concern is that this cap is actually going to lead to a move
back from that.
On what steps banks should take in light of recent news, the
Linklaters lawyer said they shouldnt rush into changing
remuneration policies. At this stage we havent seen
the final legislation or the guidance from the European Banking
Authority yet, she said.
Basel III is expected to take effect by January 2014.
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