The cap
Europe now has the most stringent pay practices for
financial institutions in the world.
Since 1 January 2014, UK banks have been subject to a rule meaning that
bankers’ annual bonuses cannot be greater than their salary – or double their
salary if approved by shareholders. The first
bonuses to be affected will be awarded in 2015 for work undertaken in 2014.
The cap represents a significant change to the
remuneration structures of affected institutions and signifies the willingness
of the EU to adopt an increasingly interventionist approach to remuneration in
the financial sector.
Avoiding the
cap
Now that the cap has been implemented, the focus of
media attention has shifted to how banks plan to sidestep the cap.
Curbs on remuneration in the banking sector are
nothing new. Nor is the fervent work
going on behind the scenes at banks to structure remuneration packages in a way
that balances adherence to the rules while minimising their impact.
Barclays
RBS
Royal Bank of Scotland (‘RBS’) was
the next bank to come under scrutiny and was forced to deny reports published
in the Sunday Times last December that it was initiating a widespread increase
of base salaries in order to sidestep the cap.
The level of interest in RBS’ plans is no surprise given that 81% of RBS’
shares are owned by the UK government following the bailout in 2008. The bank
also previously faced a storm of criticism over the remuneration package of its
former boss, Stephen Hester, who was at the banks’ helm as the Libor-rate
fixing scandal unfolded.
HSBC
More recently, reports have been published alleging that HSBC, Europe’s biggest bank, is preparing to hand out multi-million pound share awards to 1,000 of its top staff in order to bypass the new rules.[2] HSBC – more so than other banks – has made its stance on the bonus cap very clear.
As HSBC announced its interim
results in August 2013, chairman Douglas Flint stated that that cap could be ‘very
damaging’ and make it difficult to maintain a competitive edge in the global
market.[3]
Indeed, within the financial sector, a key concern arising from the cap is the
ability of banks to recruit and retain the best talent. Over three
quarters of bank staff earning over €1 million are based in the UK and concerns
exist that the cap creates an ‘unequal playing field’[4] and an
uncompetitive environment in which professionals will be drawn to work outside
of the UK or Europe.
In light of this issue, in a
question and answer paper form the HSBC annual general meeting last August,
HSBC openly revealed that it was consulting on the issue of pay and has since
toyed with the idea of increasing base salaries.[5]
As the new rules bite for work
and performance in 2014, firms will invariably continue to reformulate their
remuneration packages in ways that adhere to the rules but dramatically
minimise their impact and undermine the purpose of their implementation.
UK legal
challenge
As banks continue to re-formulate their
remuneration packages in earnest, the UK’s legal challenge against the cap will
rumble on in the background.
In September 2013, the UK Treasury launched a legal challenge against the cap by filing a claim at the European Court of Justice. The brief announcement published by the Treasury on 25 September 2013[6] highlights the main areas of concern: (i) the cap will merely lead to an increase in fixed rate pay, (ii) the lack of proper consultation and impact assessment undertaken before the introduction of the cap and (iii) the unlawful delegation of policy-making powers to the European Banking Authority going beyond its remit of setting technical standards.
The Treasury’s case also challenges the lack of
legal certainty surrounding the proposals, its wrongful application outside the
EU and its potential contravention of data protection laws.
The outcome of the legal challenge will not come to fruition
in the near future. Such cases normally
take between 18 months and 2 years to be heard.
Outlook
The government’s concern that the bonus cap will simply
lead to an increase in base salaries for top earners seems realistic. On top of that, firms will continue to
reformulate their remuneration packages in novel but legal ways in order to
adhere to the rules but significantly reduce their impact.
The cap was introduced to address the effect of poorly
designed remuneration structures on the management of risk and control of
risk-taking by individuals at financial institutions.[7] However, as firms continue to look for ways
to avoid an exodus of key staff to locations such as Asia or the US, an
increase in fixed salaries (which, unlike bonuses, cannot be clawed back if the
institution gets into financial difficulties), together with the adoption of
alternative pay schemes, seems likely.
The legislation behind the bonus cap comes with a pointed
message, but the rule itself appears to be something of a blunt instrument.
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