Bankers’ Bonuses: The EU acts
- What is proposed?
However, the ratio can be raised to 1:2 with the express permission of the shareholders. The proposals stipulate with some care the majority necessary to pass any proposal to permit the higher level of remuneration. Where permission is obtained for the more generous entitlement, 25% of the bonus must be deferred for at least 5 years.
- Who has agreed these proposals?
- What is the significance of this announcement?
- Is this an attack on the free market? Are other sectors subject to such limitations?
The proposals include new requirements in respect of retained capital and transparency which are intended to move banking in Europe towards compliance with the regime developed by the Basel Committee on Banking Supervision and favoured by the G20, known as Basel III.
The controversial question is whether, as part of this package of regulation, there is any need for direct control of bankers' pay. The European perspective is that the global economic crisis was at least in part caused by bank employees taking on too much risk. It is thought that the emphasis on remuneration by bonus within the sector incentivized irrational risk taking. Neither proposition is uncontroversial. The causes of the crisis are unlikely to be quite so simple and the suggestion that bonuses increase risk-taking seems to be based more on intuition than study.
- The UK government was the sole voice of dissent, is there any way in which the government could challenge or limit the effect of the decision?
There has also been talk of the UK invoking the "Luxembourg Compromise". It sounds like the title of the world's dullest thriller but refers to a convention, the present scope of which is itself controversial, for there to be a veto where a proposal adversely affected a state's "very important national interest". It remains to be seen whether George Osborne would be prepared to risk playing that card. To play it and lose would likely have very considerable political consequences.
- What impact will this have on remuneration structures in the banking sector?
- What are the relevant merits/downsides of the various options:
- Higher basic salary
From the bank's point of view, decoupling remuneration from results may have a number of disadvantages. When an employee's performance falls off, the impact on income is lessened. When the bank's overall performance is affected, cost cutting may require re-negotiation of terms and conditions rather than changing the often non-contractual terms of a bonus policy.
- Shareholder permission to exceed basic cap
- Supplementary (non-cash) benefits
- Do you believe financial institutions will leave Europe?
Sean Jones QC
This book is intended as a handbook for advisers to employers, providing an overview of the...