The EU is signalling more remuneration regulation.
Banking Cap Rewrite Possible
The banking bonus cap, in its inaugural year, limits bonuses to 100% of employees’ fixed salary or a maximum of twice fixed salary with shareholder approval.
European bankers are worried that reducing pay to move in line with the legislation would disadvantage them in the global war for talent. Barclays said that it had to pay bonuses to avoid a “death spiral” where hundreds of key staff were leaving the organisation.
There were also concerns that the rule would simply lead to higher fixed salaries, which would reduce the banks’ ability to adjust costs in difficult times. This reason is even being used as part of a court case the UK is bringing against the EU to try and dismantle the cap.
In the face of these concerns, HSBC introduced the concept of allowances – cash- or share-based awards made on a monthly or quarterly basis to boost the fixed pay of senior staff. Lloyds and Barclays quickly declared their intention to do the same.
This innovation created rumblings amongst lawmakers that the rule is not strict enough. The European Banking Authority is currently considering whether the allowances break the rule and the EU Parliament is reportedly considering whether it will veto the rule or undertake a rewrite.
If the Parliament rejects the new rule, there may be nothing in place to regulate the next round of bonuses.
Management to Worker Pay Ratios extend to Europe?
The bonus cap is not the end of EU pay regulation.
London’s Financial Times reports that draft proposals from the EU Commission to be unveiled next month will give shareholders a veto on the ratio between Board pay and the average worker.
The proposal would require shareholders to approve remuneration policies that set a maximum pay and bonus level and disclose the Director-worker pay gap with an explanation of why the ratio is considered appropriate.
A binding vote on policy has already been introduced in some countries such as the UK, while the US is on track to mandate the disclosure of the ratio between the CEO’s pay and that of the median worker.
Curbs on Asset Manager Remuneration
EU member States also recently agreed on restrictions for fund manager pay. It will affect companies operating in the EU that manage UCITS (Undertakings For The Collective Investment Of Transferable Securities) funds.
To discourage excessive risk-taking the restrictions stipulate that:
- Half of any variable pay must be taken as units in the fund manager’s investment fund; and
- 40% of bonuses must be deferred for three years
Countries will have 18 months to introduce the law once it is signed off.
Bank of England Consults on Clawback Expansion
In the UK, the Bank of England is also proposing new bank regulation, opening a consultation into whether Prudential Regulation Authority authorised firms should be required to amend employment contracts to state that clawback applies to vested bonuses, not just unvested bonuses, as is currently the case. Bonuses could be clawed back where there was:
- reasonable evidence of employee misbehaviour or material error;
- the firm or the relevant business unit suffered a material downturn in its financial performance; or
- the firm or the relevant business unit suffered a material failure of risk management
for a period up to six years after the bonuses vested.
The deadline for contracts to be amended would be January 2015, although the Bank of England stated that it would expect action prior to that date.
Clawback would not be limited to employees directly culpable of malfeasance, but also cover employees who could have reasonably expected to be aware of the problem but failed to take adequate steps or were responsible for the failure by virtue of their role or seniority including senior staff in charge of setting the firm’s culture and strategy.