European regulators crackdown on bonuses

Last week, European regulators said the bank’s use of role-based allowances, a move approved by the Bank of England on the basis they were part of a fixed salary, was not justifiable.

UK banks had argued that the cap places banks at a disadvantage to US and Asian companies, as these are linked to a banker’s role, not to the institution’s financial performance, but can be withheld by the bank.

However, the EBA said that “institutions which use such discretionary role-based allowances will be expected to treat them as variable remuneration and change their remuneration policies so that they comply”.

It highlighted the fact that such allowances are discretionary, “which allows institutions to adjust or withdraw them unilaterally, without any justification”.

The clampdown will affect bank pay for this and next year, the regulator said, meaning an almost immediate impact on UK banks.

Professor John Thanassoulis, of finance at Warwick Business School said: “Today the European Banking Authority has declared that almost all ‘role-based remuneration’ is essentially bonuses.

“This is common sense in situations where the remuneration had all the features of a bonus, except that it was paid out in 12 monthly instalments over the course of a year. This ruling means that banks cannot use this thin veil to escape from the bonus caps which European legislators have agreed.”

However, he added that the ruling did not say that the bonus caps were without problems, nor that they could not be improved.

Mr Thanassoulis added: “The problem of the bonus cap is that banks need to pay at market levels to keep the bankers they need. By capping bonuses, and having the EBA enforce that cap, banks will be forced to actually raise fixed pay.

“This fixed pay, when multiplied across a large part of their workforce, will represent a crippling bill for banks in times of stress. In short, this cap makes banks riskier as it pushes up their fixed costs.”