New European rules limiting bankers bonuses to one or two times their salaries is posing a challenge to a handful of bank giants, according to this article in the NYTimes DealBook, who are looking for a work-around solution which will keep their extremely highly paid employees on-side. Of course, there is a huge risk that the “role-based pay”, as it is being dubbed, would undermine the essence of the regulations, stymieing plans to pay bonuses on a deferred time frame and in shares, which would allow banks to keep funds if the deals go bad.
Banks in London Devise Way Around Europe’s Bonus Rules
LONDON — A battle over banker bonuses is building in this financial capital.
Since the 2008 crisis, regulators around the world have tried to rein in bonuses, worried that big payouts encourage excessive risk-taking by bankers and traders. The European Union has gone further than most, limiting bankers to bonuses equal to one or two times their salaries.
But the bank giants operating in London — including Goldman Sachs, Bank of America Merrill Lynch and Barclays — are seeking to outflank the new restrictions. Responding to the law, they are structuring new pay packages that try to satisfy both their emboldened regulators and their very expensive employees.
So goodbye, big bonus.
Hello, role-based pay.
Other banks have called their new payments “allowances.” At least one labeled it “reviewable salary.”
One of the European lawmakers who led the push for bonus caps is not buying the semantic somersaults.
“These are bonuses in disguise,” said Philippe Lamberts, a Belgian member of the Green Party in the European Parliament. “I wonder how they will hold up in a court of law.”
The banks are nonetheless pressing on with the changes, with the goal of making sure their top talent in Europe gets paid.
Yet as the banks tie themselves in knots to comply with the bonus cap law, the new pay packages may undermine what bank regulators worldwide have sought to do for nearly six years: force banks to stagger the payment of bonuses over much longer periods. Such deferrals, as they are known on Wall Street, enable the money to be taken back if bets go bad.
“This may leave us not just no better off, but worse off from the management of systemic risk,” said Andrew Tyrie, chairman of the Treasury Select Committee and a Conservative member of Parliament. The commission on banking standards that he led concluded, among other issues, that compensation needed to include longer deferrals and more take-backs to discourage excessive risk-taking.
But the new structures — which do not entirely replace bonuses — pay more upfront and leave less available to take back.
“It doesn’t chime well with what regulators are asking banks to do,” said Jon Terry, head of the global financial services human resources leader at PricewaterhouseCoopers in London, which is working with many of the leading banks.
Bank executives and many leading political figures in Britain say that the bonus-cap law, which applies to European banks and the European operations of global banks, will drive up their fixed costs of compensation by forcing them to pay more in annual salary.
It also creates an unfair playing field, they say, noting that bankers and traders in New York, Hong Kong or Singapore face no such constraints.
“It makes London less competitive against the U.S. and Singapore and anywhere outside the E.U.,” said Stephen Brooks of the PA Consulting Group in London. “That’s a disadvantage to the E.U.”
For the moment, the banks in London have an ally in the British government, which is suing to block the law, saying that theEuropean Commission has overstepped its authority. (Banker compensation is important to the British government, which gets 60 cents of every bonus dollar in the form of taxes and national insurance, according to Mr. Brooks.)
And British regulators so far seem comfortable with the new pay structures, with banks including Barclays and Goldman Sachs indicating in memos to employees and internal conversations that they have conferred with their regulator on the pay packages.
The 2013 European law limits certain bankers to bonuses equal to one times their salary, or two times if shareholders approve it. It defines what is considered fixed pay and what is variable pay, more commonly known as bonuses.
The banks were clearly in a bind. Data from the European Banking Authority show that in 2012 top bankers earned bonuses of two and a half to five and a half times as much as their salaries. In 2012, for example, Goldman Sachs paid its 115 so-called code staff employees in Europe — those to whom the caps apply — $86.1 million in salary and $450.7 million in cash and stock bonuses. That averages to about $4.7 million in total compensation for each person, with the bonus equal to 5.2 times as much as the salary.
But bank executives and their lawyers and consultants spotted an opening in the rigid definitions, with payments that are neither fixed, like a salary, nor variable, like a bonus.
For example, such payments may be made weekly, monthly or semiannually — like a salary — but they cannot be applied to pensions, making them more like a bonus. For some, the amounts will be reset every year, like a salary, and for others, it can vary with the economic environment, or a banker’s new role, like a bonus.
The British regulator has told the banks that the payments will most likely pass muster if they are noncontractual and not based on performance, according to compensation consultants, bank officials and lawyers. This is a bit of a turnaround for an industry that believes its extraordinarily high compensation is justified on the basis of exceptional performance.
A spokeswoman for the Prudential Regulatory Authority, which is an arm of the Bank of England and regulates the banks, declined to comment.
Antony P. Jenkins, Barclays’ chief executive, said this week that role-based pay was “not performance-related, but an adjustment to fixed pay.” After announcing a drop in profits and job cuts, Mr. Jenkins defended the decision to increase the investment bank’s bonus pool by 13 percent.
“Barclays does not set competitive rates in the marketplace,” he said, insisting that it was in the interest of shareholders to attract and retain top talent (though he waived his own bonus of £2.7 million, or $4.5 million). The move prompted some corporate governance experts to question, “for whom is this institution being run?” as Roger Barker, head of corporate governance at the Institute of Directors, put it.
Payments to employees that are of similar size to bonuses are expected to raise many questions. Traditionally, traders have been paid largely on the basis of their business unit’s profits. Healthy employee incentives could be undermined if large sums were being paid out on the basis of broader measures like the wider economic environment or a person’s job description. Shareholders, in particular, might protest. The unorthodox payments come at the same time that British regulators have been trying to press banks to repair their ethical culture.
At a hearing last year, Andrew Bailey, the chief of the Prudential Regulation Authority, described one unintended effect of the bonus cap. “It will also institute an unhelpful culture of banks spending their time finding ways around the rules,” he said.
His prediction did not take long to come true. Barclays, for example, explained its new role-based pay in a memo to employees in November. The pay, the memo said, would allow the bank to comply with the European legislation and offer “competitive market compensation to employees.” In January, Bank of America Merrill Lynch told its client-facing managing directors in London that they would get a 20 percent pay raise to $500,000 (£303,000).
While the law came from the European Parliament, the recently created European Banking Authority is charged with defining to whom the law applies. It is now writing guidelines to further clarify what constitutes “fixed and variable” compensation.
Both the authority and the European Commission can investigate noncompliance, and the commission can bring a case to the European Court of Justice. This raises the risk of regulatory penalties to banks trying to make bonuses look like other types of pay.
“We expect all banks to comply strictly with European rules on bonuses, and continuous talk about how to circumvent the rules is disturbing,” said Michel Barnier, Europe’s commissioner for overseeing financial services.
Jenny Anderson reported from London, and Peter Eavis from New York.