European Banks' Millionaire Club Swells as Pay Shifts to Salary

  • Largest number of highest earners work in the U.K., EBA says
  • EU bonus cap led to sizable move from variable to fixed pay

The number of bankers in the European Union earning more than 1 million euros ($1.1 million) soared in 2014, while the bloc’s bonus cap led to a shift toward fixed pay, according to the European Banking Authority.

The million-plus club swelled 22 percent from 2013 to 3,865, with the largest part working in the U.K., which registered a 40 percent increase, the EBA said in a report on Wednesday. The steeper rise was mainly due to the appreciation of the pound against the euro, the London-based regulator said. Stripping out the currency effect, the number of top-earning U.K. bankers would have increased 16 percent.

The EU’s ban on bonuses of more than twice fixed pay prompted many banks to increase salaries at the expense of variable remuneration, the EBA said. The average ratio of variable to fixed pay for high earners plummeted to 127 percent in 2014 from 317 percent a year earlier.

The European Commission, the EU’s executive arm, is reassessing the cap on bankers’ bonuses, which has come under heavy criticism from some regulators, especially in the U.K., and from the financial industry. Jonathan Hill, the EU’s financial-services commissioner, has said the cap could skew incentives for bankers.

If the cap “leads to increases in fixed pay, and then doesn’t find a way of having more flexibility to reduce it if performance goes wrong,” it could impair incentives by weakening the link between remuneration and performance, Hill said earlier this month.

‘Excessive Risk-Taking’

Mark Carney, governor of the Bank of England, has gone farther in criticizing the impact of the bonus limit, which can “have the undesirable side effect” of making it harder to control a banker’s overall pay package. With the cap in place, regulators might need to develop rules to “put non-bonus or fixed pay at risk” to “ensure that the burden of excessive risk-taking and misconduct by staff can still be borne by those staff,” he said in 2014.

The EBA said that when it sought industry and public views on planned remuneration guidelines for banks, many respondents said the bonus cap “would negatively affect the cost flexibility of institutions and could have a negative impact on their financial stability.”

But the regulator rejected such concerns. “The bonus cap has led to a very small increase in the fixed costs and this is only in some institutions,” it said. “The present analysis shows no indication that the so-called bonus cap has a potentially detrimental effect on institutions’ financial stability.”

Cost Flexibility

Fixed pay for so-called identified staff -- bankers who could materially alter their firms’ risk profile -- accounts for less than 5 percent of administrative costs at most banks, and less than 10 percent in nearly all cases, the EBA said.

“This ratio has increased compared to the past mainly due to the increase in the number of identified staff,” the regulator said. “Given the low percentage of fixed remuneration for identified staff in terms of overall administrative costs, and the limited increase in fixed remuneration for all identified staff due to the so-called bonus cap, the effect of the cap on cost flexibility is not material for the overall cost flexibility of institutions.”

The percentage of top earners who are identified staff increased to 87 percent in 2014 from 59 percent a year earlier after rules to identify them were tightened, the EBA said.

Before it's here, it's on the Bloomberg Terminal.