Chancellor George Osborne has failed to water down the European Commission and European Parliament’s preliminary agreement on capping bonus payments in the financial services sector.
The cap will limit bankers’ bonuses to one-time salary, or two-times salary if a majority of shareholders agree. There will be some leeway for long-term incentives, although the details of this are still to be agreed by the European Banking Authority.
The preliminary agreement will be put to a vote on 21 May 2013. It will have to be approved and adopted by the EU Council before being implemented by member states. It is expected to come into effect on 1 January 2014.
Sophie Black, a partner in Mercer’s executive compensation division, said: “We expect to see salaries increase and some shareholders are saying this will take pay away from performance. It will completely debalance the banks’ compensation structures.
“We are hearing people say this will drive top talent out of the UK’s financial services, but I don’t think the workforce is that mobile. One of the reasons why London has grown is that it is ideally situated to trade globally.”
Some UK organisations have already implemented bonus caps. Last month, for example, the Royal Bank of Scotland’s annual results revealed that it is capping the cash bonus paid to all employees at £2,000.
Meanwhile, hedge fund business Man Group has introduced a bonus cap of 250% of salary for executives under a new incentive plan.
Jon Terry, remuneration partner at PricewaterhouseCoopers, said: “Capping bonuses to the extent proposed is a major problem for European banks and will create huge unintended consequences.
“Salaries are almost certain to rise substantially, leaving banks with less flexibility to reduce or claw back bonuses when needed. “Bonus caps will reduce boards’ flexibility in managing the cost base and shareholders’ ability to influence pay outcomes. What we really need is greater alignment between performance and pay. Capping bonuses will weaken that link.”
Since the April issue of Employee Benefits went to press European Parliament reached an agreement on the bankers’ bonus cap.
What employers need to know:
- The European Commission and European Parliament cap will limit bankers’ bonuses to one-time salary, or two-times salary if a majority of shareholders agree.
- Details are still to be agreed by the European Banking Authority.
- Some organisations have already implemented bonus caps.