Stopping the Greed or Shunning the Talent: is the EU going too far with bankers’ bonus caps?

Stopping the Greed or Shunning the Talent: is the EU going too far with bankers’ bonus caps?

The EU is at it again! The chief financial services officer of the EU, Michel Barnier, pledged to stop banks’ practices of sidestepping the EU cap on bonuses. On Sunday Mr Barnier asked the European Banking Authority to complete, by the end of September, its investigation into whether the quarterly and monthly allowances several banks have begun giving top staff to increase their fixed pay can be allowed under the EU bonus cap rule.

Amid much furore from the banks, and in the wake of the bonus scandals linked to the most recent financial crisis, the EU announced caps on bonuses for bankers which came into effect at the beginning of this year. The caps mean that bankers working in Europe can only be paid a bonus of less than or equal to their annual salary or, with shareholder approval, up to twice as much.

The reasoning behind the caps, according the EU, is to prevent the kind of pay structure (small salaries, large bonuses) which incentivises big risk taking in the short term, and to bring more transparency into the murky world of bankers’ pay. There are some restrictions on who is included in the cap. It basically covers high earners (over €500,000), senior managers and heads of important departments. Banks can seek to have some of its employees excluded from the cap if their functions do not affect the bank’s risk profile.

As expected, the bankers have not taken  kindly to the caps, and some banks  have come under scrutiny of late for trying to circumvent the rules by offering large numbers of company shares to top executives, such as was the case at Barclay’s and HSBC. Some banks, including Barclays, HSBC and RBS, have implemented systems to pay fixed allowances several times a year, based on the roles of banks’ executives.

In their defence, the banks claim that the caps are too harsh and hurt their payroll and recruiting practices. Paying high variable bonuses permits a bank to keep a check on costs. When times are good, and profits are up they can afford to pay their top earners big bonuses; when times are bad – it’s just the set salary. The cap takes away that level of flexibility.

Additionally, because the cap applies to all bankers who work in Europe, including those who work for non-European banks, and those who work for the international operations of European banks, the cap makes it much more difficult for European banks to compete for top talent in key markets like the USA and Asia.

In the UK, the Treasury and banking regulators fear the cap will not cut bankers’ incomes, but instead cause a rise in salaries. The Bank of England has lobbied against the new rules, fearing they will undermine financial stability. Chancellor George Osborne is tackling the cap in the European courts. He is concerned that limiting bankers' pay could threaten London's position as a leading global financial centre, as top talent looks to head out of Europe. However, Mr Osborne himself has come under criticism in Europe for failing to implement EU law, and the UK could face being taken to court by the European Commission over the issue.

So dear reader, what do you think? Is the EU right to limit those dastardly bankers and their huge pay checks or should the banks be allowed to reward performance with handsome bonuses? Please take a moment to vote in our online poll.

online poll by Opinion Stage

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About the author:
Prior to joining LexisNexis Michelle worked at Bingham McCutchen LLP as a financial services associate in Washington, DC and London. At Bingham, Michelle represented financial institutions in connection with regulatory investigations and enforcement actions and advised UK and foreign broker-dealers regarding doing business in the USA. Michelle spent 6 months on secondment at JP Morgan in New York.