EU bank bonus cap doubted by industry experts

The European Parliament’s decision to cap bankers’ bonuses so they can be no larger than base pay has today been widely criticised by experts in the industry.

“It has been poorly thought through and is yet another example of politicians trying to win popularity by bashing bankers,” says Stephen Brooks, people management and organisational change expert at PA Consulting Group in London.

Members of the European Parliament (MEPs) have agreed on a mandatory 1:1 ratio of base salary to variable pay, which can rise to 1:2 subject to shareholder approval. Up to a quarter of variable pay can also be issued in instruments deferred for more than five years.

Brooks argues this will simply lead to increases in fixed salaries.

“If you’re on £200,000 and I want to give you a £1 million bonus, then I’ll just make your salary £1.2 million for the next year,” he says. “There are lots of ways you can get round it.”

However, MEP Vicky Ford, who negotiated for the Parliament, does not believe the bonus cap will have a significant impact for most bankers.

“The vast number of people who work for banks do not receive bonuses in excess of 1:1, so it doesn’t affect them at all,” she says. “Once you’ve done the shareholder cap, anyone under 1:2 will not be affected. Plus, you can take into account this long-term deferral. I suspect most banks will be able to live with it, and there will be just a handful who squeal.”

Financial regulators, including authorities in the US, the UK, Hong Kong and Singapore, have encouraged long-dated payment schemes to ensure staff are held responsible for their long-term performance. However, Brooks – who was formerly head of human resources at Lehman Brothers in 2000 – warns this should not be prioritised over risk management processes.

“A third of an employee’s bonus [at Lehman Brothers] was paid in Lehman shares, which were deferred for three years, but that didn’t stop Lehman from going bust. They didn’t realise the risks that banks were running.”

The legislation agreed by the European Parliament means international banks operating in the European Union (EU) and European banks based abroad will not be exempt from the cap.

“People in New York and Singapore will be rubbing their hands and rolling out the red carpet for some of our star players to go over there,” says a banking source. 

Financial institutions are likely to move their headquarters to outside of the EU, says Brooks. 

The European Parliament has agreed to examine the impact of the remuneration curbs two years after implementation. However, the legislation is “too late”, according to Brooks, who says most regulators have already taken action in this area.

In 2009, finance ministers and governors from the Group of 20 (G-20) group of advanced economies called for reforms in compensation practices.

In the UK, the Financial Services Authority’s rules on remuneration came into force on January 1, 2010, in line with the G-20 agreement. The regulation includes, for example, the clawback of bonus payments following poor performance. It also states that bonus pools must take into account the full range of current and potential risks.


This article was first published on Risk

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