What we know

  • Agreement reached on 27 February by EU Committee on Economic and Monetary Affairs.

  • Core proposal that annual bonuses must not exceed annual salaries unless shareholders have approved a higher ratio of 1:2. If bonus is above 1:1, one quarter of the whole bonus to be deferred for at least 5 years.

  • UK Government will continue to strongly lobby against this.

  • If approved by Member States and European Parliament (vote expected 15 to 18 April), Member States will be required to bring in legislation to take effect by 1 January 2014.

Likely impact

This proposal is rightly recognised as a major political issue for the UK, particularly on the basis of its potential impact on London’s competiveness as a financial centre as against other world centres. Most eloquently, Boris Johnson is quoted as saying:

“People will wonder why we stay in the EU if it persists in such transparently self defeating policies. Brussels cannot control the global market for banking talent. Brussels cannot set pay for bankers around the world.”

The most this measure can hope to achieve is a boost for Zurich and Singapore and New York at the expense of a struggling EU. This is possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman empire.”

For those with short memories, this is referring to an edict on maximum prices introduced in AD 301.

Assuming the UK cannot successfully block the proposal, and given that approval is through qualified majority voting, there is not an effective veto. Inevitably, this measure will have a very significant impact on practice in relation to the payment of bonuses, within major banks and no doubt, in due course, the City as a whole. One fundamental issue will be whether, as has been suggested by some, this proposal would only cover Remuneration Code staff or all bank staff. Another will be the geographic ambit –the current proposal is this would catch staff of EU banks working anywhere in the world.

The view of many is that the impact of this proposal will be to serve as a further push to increase base salaries. If so, in addition to arguments as to whether or not, as a result of increasing bank fixed costs, the ultimate effect may be to curb lending, one inevitable consequence would be to further reduce the flexibility within banks to ride periods of economic downturn therefore, no doubt leading to quicker and more widespread redundancies in a downturn as arguably, is already happening now. The FSA has also indicated that it regards increases in base salary as a concern, given that the greater the amount of total remuneration paid through base salary, the less the scope to use variable compensation as an effective lever to moderate behaviour, and, thereby, reduce risk taking. Arguably, therefore, one of the strongest arguments against the proposal, if the FSA’s analysis is correct, is that it may have exactly the opposite of its intended effect, to reduce risk taking within major banks. There has also been some discussion as to whether, if base salary levels are to be increased, it might be possible for employers to make much more active use of annual, or even more frequent, salary review provisions, to reduce salary up and down, dependant on performance.

We will continue to update you on this crucial issue.

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