Bonus cap to hit EU bank staff all across the globe

Tim Wallace
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LAWMAKERS are set to vote on the bonus cap in late April, bringing the limit on pay into force next year as part of a wider package of reforms.

Traditionally banks have paid star traders enormous rewards when they generated a lot of income for the firm, and a far smaller amount in bad years when performance or markets were weak, aligning pay with performance.

But in the wake of the financial crisis the EU is acting to bring that flexible approach to end with the new rules, putting greater emphasis on salaries and less on variable factors.

Bonuses will be capped at the level of salary, unless a supermajority of shareholders votes to increase that to twice salary. At least 65 per cent of shareholders, holding at least 50 per cent of the shares would be required. And if fewer than 65 per cent favoured the move, votes worth 75 per cent of shares would be needed.

If the higher payout was chosen, a quarter of the bonus would have to be deferred for at least five years.

The rule will apply to European banks’ operations across the world, and the European operations of foreign banks. It is thought that the EU will try to apply the rule even to non-EU banks’ staff based outside the EU if those teams work in EU markets.

That raises potentially problematic questions over extraterritoriality, though the EU has expanded its operations overseas, including with the planned financial transactions tax.

The Federation of European Employers hoped to challenge the plan on the basis that EU treaties prohibit limits on pay. But lawyers doubt that will work, arguing the wording has been designed to make sure it is not a cap on absolute pay but simply a ratio between fixed and variable pay.

MEPs also pushed through a proposal to force banks to declare tax payments, turnover and employees by country across their operations, as part of the deal.

Although not opposed to transparency itself, banks fear this information will be deliberately misused by critics.

“A lot of work goes into these figures, they are complex and need a lot of explanation,” said an industry source.

“Joe Public knows nothing about banking or cross border accounting rules and will be presented with these figures in isolation. He won’t understand this is a crude figure and that opens the data up to be misused.”


The EU wants to cap bankers’ bonuses from the start of 2014

No banker will be allowed to get a bonus bigger than their salary without the shareholders approving a more lenient regime

If more than 65 per cent of shareholders say so, that limit can be lifted to two-times salary

But even then 20 per cent of the bonus will have to be deferred for five years

All bankers in the EU will be affected ­– and ­­all of their global operations will be hit as well

Non-EU banks will also be hit, with the authorities planning on capping pay in their EU operations

The UK opposes the plan, but the Irish presidency of the European Council has agreed the plan with MEPs

And after a brief period of final negotiations next week the text will go to a vote in April

That only needs a majority in the European Council to be approved. The result is likely to be a majority of 26 countries against one – the UK

And even though the UK dislikes the cap, it may not vote against it because it has been rolled into a larger package of bank reforms which Britain likes, including capital and liquidity rules

Another new element introduced this week would see banks forced to publish data on headcount, turnover and tax payments in each country of operation

Although banks to not oppose the extra transparency per se, they do fear the information they give out would be deliberately misused by their critics, harming the sector’s reputation further