You’ll have to wear the cap – whether it fits or not…More on bankers’ bonuses

24th May 2013

Catherine Gannon, managing partner at Gannons Solicitors, considers the EU’s cap in bankers’ bonuses in a guest post below.

Following on from an EU announcement in March that there would be a cap on bankers’ bonuses to one year’s salary (two with shareholder approval) it appears that the scope of the cap is to be significantly broadened.

The cap is to apply to “material risk takers.”  PWC appear to have the inside track on this and they say that it is now intended that this includes any banker whose total pay is more than 500,000 Euros.  Previously banks have been able to identify who “risk takers” are.

This approach, if adopted, will see many more bankers caught by the cap than had been thought would be the case.  For example, of 1393 staff that Barclays have paid more than 500,000 Euros in 2012 they regarded only 393 as risk takers.

That “risk taking” is defined simply by reference to an arbitrary earnings figure, irrespective of a person’s role or their impact on the risk taken by the bank, is obviously a crude approach which smacks more of bashing the bankers rather than the stated aim of reducing the culture of risk taking in banks.

In any event, capping bonuses may well see an increase in salaries as banks seek to keep valued staff (and business).  Arguably, this could give rise to the perverse result that more rather than less risk is taken.  Where more of a package is guaranteed as a fixed salary paid irrespective of results the banker may be more comfortable taking risk.  Rather than high fixed salaries, lower salaries with bonuses subject to claw back provisions together with rules as to performance measures to be adopted in allocating bonuses could well be a more effective mechanism to adopt to manage risk.

Essentially the cap is political and the UK government stands entirely isolated in the regard. In all likelihood the new rules will take effect in respect of bonuses awarded in respect of the period commencing January 2014.

In addition, although it’s being argued that the EU is exceeding its powers in implementing the cap , as Article 153(5)) of the EU Treaty restricts the EU legislating on pay, the prevailing view is that the EU is only prevented from setting limits on pay, rather than setting a ratio between fixed and variable pay, which is how the cap on bonuses is being implemented.  Can we bet against the European Courts not following this view?

Banks are of course looking at work-arounds.  For example, other than increasing salaries, there may be scope for issuing shares in a manner that the bonus cap won’t be exceeded but the shares could significantly increase in value.

In the round Banks will, in short order, have to restructure and renegotiate remuneration structures to avoid losing valued staff and business and employees ought to take advice that any changes don’t prejudice accrued entitlements and that changes are in any event being implemented reasonably (there is after all no need for those whose pay has been less than 500,000 Euros to be affected at all). See http://www.gannons.co.uk/expertise/contracts/employment-contracts/altering-employment-terms/ for more information on altering employment terms.

Article by Gannons Solicitors. www.gannons.co.uk/

 

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