European plans to levy the world’s toughest bonus restrictions on bankers drew condemnation in London as the industry warned it may backfire as firms raise fixed pay instead.
The agreement of European Parliament lawmakers and government officials in Brussels today to ban bonuses that are more than twice bankers’ fixed pay starting Jan. 1, if ratified by European Union countries and the full Parliament, will be a blow to banks in the 27-member states, pay consultants and the U.K. government said.
“Salaries are almost certain to rise substantially, leaving banks with less flexibility to reduce or claw back bonuses when needed,” said Jon Terry, compensation partner at PricewaterhouseCoopers LLP in London. “The failure to grant an exclusion for employees outside the EU is a blow for the large EU banks who will now need to compete with one arm tied behind their backs against non-EU banks in New York or Hong Kong.”
The City, as the London district is known, is the world’s number one financial center, according to consulting firm Z/Yen Group Ltd., and is the European securities operations hub of firms including Deutsche Bank AG, UBS AG and Credit Suisse Group AG. It’s also home to a financial-services industry where employment may fall to a 20-year low in 2013 and that has been plagued by scandals including interest-rate rigging and government bailouts of U.K. banks.
About half of European investment-banking activity is conducted through London and the U.K.’s financial firms generated almost 12 percent of the country’s tax revenue from 2011 to 2012, according to TheCityUK, a bank lobbying group.
“We will want to consider the impact on competitiveness,” U.K. Prime Minister David Cameron’s spokesman, Jean-Christophe Gray, told reporters in London today. He said that smaller bonuses would mean larger basic pay, which isn’t subject to any delay or clawback.
This is a “disgraceful, politically motivated, beggar-thy-neighbor piece of legislation dreamed up by jealousy and populism,” said John Purcell, chief executive officer of Purcell & Co., a London executive-search firm. “By increasing fixed costs, this misguided approach will make European banks more vulnerable to economic headwinds.”
Banks have already increased base salaries as a proportion of total compensation after European regulators, including those in the U.K. and France, restricted when and in what form bankers can be paid after the financial crisis. UBS, Switzerland’s largest bank, boosted investment-banking salaries for senior bankers by an average of 50 percent in 2009. The same year Citigroup Inc. doubled the base salaries of most of its London-based managing directors to about $400,000. Credit Suisse, based in Zurich, Frankfurt-based Deutsche Bank and Barclays Plc also cut bonuses and increased salaries.
“We are reviewing the details of this draft law which could impact our competitiveness and ability to attract talent, given the global nature of our growing business,” said Shaun Gamble, a spokesman for Standard Chartered Plc in London.
Spokesmen for other banks in London including Barclays and HSBC Holdings Plc declined to comment on the bonus cap draft deal. A British Bankers’ Association spokesman, Brian Mairs, also declined to comment.
“This bonus cap risks placing the EU at a competitive disadvantage to other international financial centers in Asia and the U.S.,” said Mark Boleat, policy chairman at the City of London Corporation, the financial district’s local government. “The devil will be in the detail, but removing flexibility from pay arrangements in this highly cyclical industry would seem counterintuitive -- especially if it leads to higher fixed salaries.”
Stephane Rambosson, managing partner at executive search firm Veni Partners LLP in London, said the impact of the restrictions will be focused on “a fairly small” group of bankers at the director and managing-director level.
“If an MD in investment banking on a million pounds was paid 350,000 pounds ($532,000) in salary, it’s not inconceivable to push that up to 500,000,” he said. “You will see that on a case-by-case basis for the best people.”
European Parliament lawmakers called last year for an outright ban on bonuses that exceed fixed pay. National governments resisted, warning that it could harm banks’ competitiveness and lead to higher fixed salaries.
The U.K. advocated an alternative approach in which up-front cash bonuses would be capped, while it would be left to shareholders to set limits on variable pay. Bank units based outside the EU would have been exempt from the rules.
Today’s bonus proposal, struck between European Parliament lawmakers and Ireland, which holds the EU’s rotating presidency, still needs approval of governments and the full Parliament.
The EU has said that while bonuses valued at more than twice fixed pay would be banned, special treatment would be given to loss-absorbing securities such as shares and debt that can be written down during a crisis, according to EU officials. That would apply if that part of the bonus is deferred for at least five years, they said.
“We are going further, we are saying that the bonus system itself must change,” Udo Bullmann, a German lawmaker monitoring the proposed law for the Parliament’s Socialist group, said today at a press conference in Brussels. This means “less money for bonuses, and more money for jobs and investment.”
Banks in the region have been under pressure for four years to rein in compensation and tie it more closely to performance after large cash payouts were blamed for encouraging the type of risk-taking that led to the 2008 collapse of Lehman Brothers Holdings Inc. and the subsequent financial crisis.
“A ban on bankers receiving non-deferred cash bonuses worth more than their fixed pay will, at the very least, make them consider what other options there could be for them in the market,” said Nick Sisnett, a consultant at recruiting firm Altus Partners in London. “Over the last 18 months, we have seen a significant number of bankers seek alternative employment on the buy-side or smaller institutions where pay can be more visible.”
Deutsche Bank told employees it will impose a 300,000-euro ($393,000) cap on bonuses being paid this year, three people with knowledge of the discussions said earlier this month. London-based Barclays will defer all 2012 awards for the bank’s 1,200 managing directors at the investment bank and pay bonuses of as much as 65,000 pounds in cash for more junior staff, a person with knowledge of the plans said earlier this month.
The moves by European banks to partly appease regulators haven’t worked.
“There will be no exceptions to the rule,” Othmar Karas, the European Parliament’s chief negotiator on the measure, said at a press briefing today. “We have changed the bonus structure.”