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Banker Bonuses Have Nowhere to Hide Under EU's Final Pay Rules

  • EBA issues guidelines for bonus and compensation rules
  • No exemptions for bonus cap, EBA outlines strict criteria

European Union regulators have drawn the line between fixed and variable pay: the bonus cap will receive no exemptions, and cash allowances will be closely scrutinized to avoid a circumvention of the rule.

The European Banking Authority has issued its final guidelines on remuneration Monday. While the London-based standard-setter for EU banking supervision gave leeway to smaller banks and operators through a handful of waivers, it makes it clear that the ban on bonuses of more than twice fixed pay will be enforced.

The guidelines ensure “that institutions calculate correctly and consistently the so-called bonus cap by setting out specific criteria for mapping all remuneration components into either fixed or variable pay and detailing how specific remuneration elements such as allowances, sign-on bonuses, retention bonuses and severance pay are to be recognized,” the regulator said in a statement.

In an effort to clarify EU bonus requirements put in place after the financial crisis, the EBA has elaborated that some waivers could be introduced under specific criteria, but only for payouts in instruments and for small, “non-complex” institutions. For example, an employee receiving a bonus of 3,000 pounds ($4,500) in a small bank shouldn’t be subject to strict deferral rules, the EBA said on a conference call with journalists.

Cash Allowances

The regulator’s stance on cash allowances, which depend on seniority and are also known as role-based pay, is detailed in the final guidelines. The regulator leaves little room for interpretation, or for banks to use allowances to bolster total compensation above the cap.

“Remuneration is either fixed or variable; there is no third category,” the EBA said. Moreover, “the effectiveness of risk alignment would be significantly weakened if institutions made excessive use of allowances.” Institutions need to be able to justify the use of any variable remuneration element, including allowances, retention bonuses, guaranteed variable remuneration and severance payments, the EBA said.

After EU lawmakers adopted some of the toughest compensations rules through the Capital Requirements Directive, which took effect in January 2014, financial institutions sought to reward employees by handing out allowances. 

Regulators saw the practice as a means to evade the restriction on bonuses and the EBA banned the use of role-based allowances to boost executive pay in an October 2014 opinion. Thirty-nine banks in EU countries were using allowances they classified as fixed pay at the time. In most cases, these discretionary payments to staff on top of their base salary “are not fixed, are not permanent,” violating the EU’s bonus rules, the EBA said.

The regulator then set a Dec. 31, 2014 deadline for authorities to use supervisory measures to ensure institutions reviewed remuneration policies and comply with the criteria in the report. 

The most frequent use of allowances took place in the U.K., the Bank of England’s Prudential Regulation Authority noted. The BOE pledged in November to ensure U.K. lenders adhered to the criteria set out by the EBA.

The EBA guidelines complement the CRD requirements and will come into force on Jan. 1, 2017 to allow sufficient time for institutions to adjust their remuneration policies during 2016, the EBA said. Competent authorities will have two months to express their intention to comply. Any country allowing banks to hand out bonuses above the cap can be sued by the European Commission for not complying with EU law.

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