U.K. Banks Try to Dodge Bonus Caps by Defining Risk-TakerHoward Mustoe and Ben Moshinsky
U.K. lenders are preparing to lobby the European Union’s chief banking regulator to reduce the number of employees hit by rules capping bonuses, two people familiar with the talks said.
The European Banking Authority will in the next 12 months decide which employees will be covered by the curbs after the EU said they would apply to risk-takers. Banks are trying to have the rules apply to fewer workers by recommending that the definition of a risk-taker be made stricter, said the people, who declined to be identified because the talks are private.
The EU brokered a draft deal in February to outlaw banker bonuses that are more than twice fixed pay, a move lawmakers said would prevent excessive payouts and curb irresponsible risk-taking. U.K. Chancellor of the Exchequer George Osborne opposed the curbs, saying they would harm the competitiveness of the nation’s finance industry.
“Compensation alone doesn’t solve risk-taking,” Carl Sjostrom, regional director for reward consulting in Europe at Hay Group in London, said by telephone. “There’s always someone who wants to do something that might not be sensible because they want to gain a promotion, fame or fortune.”
The U.K. has 1,300 so-called code staff, who have received Financial Services Authority approval and would be affected by the cap as it stands, Andrew Bailey, Britain’s top bank supervisor, said on March 13. According to “back of the envelope” calculations, employees may get as much as 500 million pounds ($756 million) more in base pay to offset the limit, he said.
Banks are also under pressure from U.K. lawmakers to limit their proprietary trading activities as well as European plans for a financial transactions tax. That tax could add 3.95 billion pounds to the cost of issuing U.K. government debt, according to a report commissioned by the City of London Corporation today.
Raising base pay at the expense of bonuses may backfire as firms will still have to pay salaries when revenue declines, Sjostrom said. It may even encourage risk-taking, he added.
“If you are sitting pretty with a nice fixed income of a million, it’s not so scary to gamble,” he said. “There’s an argument we will have a harder time applying claw-backs and other risk preventing measures because it will be forced onto the fixed part of compensation.”
Officials at the EBA declined to comment, as did officials at Barclays Plc, HSBC Holdings Plc, Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc and Standard Chartered Plc, Britain’s five largest lenders by market value.
“The worry is, to other parts of the world the EU looks less and less relevant,” said Chris Cummings, Chief Executive Officer of TheCityUK, a London-based lobby group that represents U.K. financial services firms. “Europe can be an entrepreneurial place to do business, but what we have to realize is this is a competitive sport.”
As the rules come into effect, international firms may decide not to expand their workforce in London, said Cummings. As well as affecting those in risk-taking roles, other supporting jobs may go, he said.
Barclays, paid 1.85 billion pounds in bonuses to employees for 2012, compared with 733 million pounds in dividends, the lender’s annual report shows. It paid 428 bankers more than 1 million pounds last year, more than any other U.K. lender.
“Across the investment-banking industry generally, and Barclays in particular, compensation has been much more variable upward in response to good performance than downward in response to poor performance,” according to an internal review, led by Anthony Salz, executive vice chairman at Rothschild, published today in London.
According to the Salz review, the average bonus for managing directors fell to 210 percent of base salary in 2012 from 350 percent the year before. Base salaries ranged between 150,000 pounds to 300,000 pounds, Salz said.
HSBC, which awarded 204 employees more than 1 million pounds in 2012, second only to Barclays, paid $3.7 billion in bonuses, less than half the $8.3 billion it paid in dividends.
“There has to be a greater alignment of shareholders and those who run their businesses for them,” Cummings said. “That has to be reflected in the split of proceeds from the success of that business.”